Nifty valuation fair, risk-reward favourable, says HDFC Securities; lists key changes in model portfolio
HDFC Securities noted that the key theme of the quarter was the continuation of input cost deflation, which helped companies improve their profitability in-spite of muted YoY revenue growth. It believes this benefit of commodity cost deflation is largely over and now future earnings growths have to be volume-led.
The brokerage further informed that large-cap stocks of the coverage universe dominated the incremental earnings, which grew by 37 percent YoY, while the midcap category grew by just 12 percent YoY. Further, 88 percent of incremental YoY earnings growth came from only three sectors—energy (56 percent), auto (16 percent) and lending financials (16 percent)—reflecting heavy lifting by these sectors, noted HDFC.
Strong YoY earnings growth was seen in auto, lending financials, industrials, real estate, energy, cement and pharma sectors, whereas, staples, metals, chemicals, IT and consumer discretionary sectors disappointed, added the brokerage. "For the HSIE coverage universe, projected earnings growth for FY24E and FY25E stands at 29.2 percent and 7.5 percent respectively, factoring in continued margin recovery and demand momentum.
FY23 was an exceptionally subdued earnings year for the energy sector due to the freeze on petrol and diesel retail prices impacting OMCs and windfall tax hurting upstream. So, excluding the energy sector, earnings growth for the coverage universe for FY24E and FY25E stood at 18.8 percent and 15.5 percent respectively," it noted.
The valuations of the Nifty 50 index are more reasonable at 17.5X FY2025E EPS in the context of moderate earnings growth, said the brokerage. Key factors to monitor in H2FY24 for Indian markets include weather conditions especially the development of El Nino,
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