Jefferies – India Outlook 2023

Global economic conditions continue to deteriorate as inflation remains high and market conditions tighten; however, Asia could be the best of a bad lot and avoid an outright recession. Asia could achieve real growth of 3-4% supported by its free trade agreements, lower cost bases and more efficient supply chains.

Chinese population is set to peak and India’s population is set to overtake China’s in 2023. This could diminish demand for the property sector. However, the central government’s stimulus package to support real estate has prevented a hard landing.

Revenge tourism will pick up Chinese tourists will get to travel now.

Dollar-strength may have peaked and Asian currencies could see some appreciation.

US-China relations could improve from here.

Japan could move out of deflation as it expects a 2.9% inflation and has announced a 29 trillion Yen stimulus. This could mean domestic institutions shift out of yen fixed income into Japanese equities.

Excessive overtightening by the US Fed could negatively impact Asian property markets. Given how much personal wealth is tied up in property the impact to consumer sentiment could be significant.

After two years of underperformance, Asia is poised to outperform developed markets led by Greater China and South Korea. Investors should be cautious with investing in India as valuations seem high.


India is likely to see a 6%+ GDP growth in 2023. Rising rates could cause only mild economic impact. Corporate earnings growth should remain at ~15% as input costs decline.

India’s growth is expected to stay resilient despite rate hikes. The developed world phenomenon of rising rates leading to slowdown in real estate and corporate spending is unlikely to happen in India. India’s real estate is seeing a multi-year pent-up demand. Corporate leverage is at a cyclical low. Private sector capex is expected to rise in 2023. Government capex could slow down as it spends more on social schemes to prepare for 2024 national elections.

The INR could see a steady weakening. The import cover of ~9 months is at a 7-year low. Trade deficit is at a record high so the import cover could further fall to ~7.5 months.

As costs moderate, corporate margins could see improvement. Key sectors that could see margin improvement are autos, cement, staples and industrials.

Steep valuations imply that Nifty will be range-bound at 17000-19500. Key picks are large banks (ICICI, SBI), developers (Godrej, DLF), autos (Maruti, Tata Motors, TVS), staples, (HUL, Godrej Consumer, Britannia) and select capital goods companies (L&T, Thermax).

Auto: After suffering its worst decade, India’s auto sector is poised for a multi-year double digit growth. Passenger vehicles could grow at a 17% CAGR through 2025, trucks could grow at 19% and two-wheelers at 18% during the period. Tractors to remain mostly flat in 2023 and even decline in 2024. Falling metal prices and growing demand could help widen margins. Two-wheeler EV registrations jumped from 0.4% in FY21 to ~5% in recent months. Two-wheeler EV market, which is dominated by TVS, could grow its size at the expense of Honda. Passenger EV adoption remains low at 1% due to a larger price differential. Tata leads the PV volumes with 8% of its cars being EVs.

Cement: Cement companies’ margins seem to have hit the bottom in in the first half of FY23 and are likely to go up hereon. Margins recovery would be led by moderation in fuel costs and price hikes. Major infrastructure spend is likely due to national elections in 2024 – 9% volume growth expected in FY23 and FY24. About 60% of the capacity addition is coming from the top 4 players. Small players are unable to execute expansions while the larger ones are consolidating the industry. Most cement companies are expected to report the lowest return ratios in 8-9 years in FY23, while improvement is likely in FY24.

Chemicals: Specialty chemicals segment could see growth in 2023 on the back of capability augmentation and capacity creation. Revenues could moderate as commodity inflation cools but margins are likely to improve on the back of lower energy and freight costs. Refrigerants and packaging films could see their margins reverting to mean.

IT: Tight client budgets, reprioritisation of tech spends, and delayed decision making amidst uncertain macro could moderate revenue growth to 7% in 2023. Margins seems to have hit the bottom and are likely to recover from here. Choice of stocks will be selective as valuations remain high.

Consumer: Demand outlook is gaining strength on the back of an expected recovery in rural demand, supported by higher prices for agri-products, inflation plateauing, modest monsoon, low base and sustained support from the government, especially ahead of the national elections in 2024. Input inflation is also moderating led by palm derivatives, edible oil and crude oil derivatives. Prices of milk, coffee, barley and wheat remain elevated. Both volume growth and earnings growth are expected. Top picks are HUL, Godrej, and Britannia. Dabur and Tata Consumer are good too. Risk: Urban discretionary demand could be hit if corporate jobs are impacted in response to a global downturn. High valuations are also a challenge.

Consumer Finance: Growth momentum of 2022 to could continue in 2023. NIMs should dip as higher rates are fully reflected in cost of finance, especially at auto lenders and affordable HFCs. Asset quality should be stable. Credit costs have largely normalized; NII should drive profit growth. Strong loan growth at auto NBFCs like Chola and AHFCs should drive healthy profit growth, despite lower NIMs. Top picks are Chola & Aavas.

Electricals: 2023 will be characterised by softer sales growth but revival of margins due to easing raw material inflation, capex revival, indigenisation, PLI plays and balance sheet strength amid rising interest rates. Crompton greaves, Polycab and Dixon Technologies remain top picks.

Energy: RIL’s gigafactories for solar PV and energy storage will see rapid progress in CY23 along with land acquisition for captive RE generation. China’s reopening is key to better refining and petrochemical margins. RIL is a preferred pick as the market is imputing zero growth on the renewable business and earnings growth are anchored on the strong performance of Jio and retail. Oil marketing companies are losing ₹9 per litre of diesel. This could continue as India heads for election next year. OMC’s earnings outlook remains clouded with govt intervention in auto fuel pricing and no clarity on compensation. Within gas, Gujarat Gas is preferred over Indraprastha Gas, which is preferred over Mahanagar Gas.

Banks: Indian banks should continue to enjoy their sweet spot of healthy credit growth (12-13% for sector), better margins and controlled credit costs, which would support 20% CAGR in profit for banks under coverage. The key challenge stays around softer deposit growth and tighter liquidity. Banks continue to invest in digital platforms and are ramping up SME and personal loans. Valuations look attractive. Top picks are ICICI Bank and IndusInd Bank.

Insurers: The segment has underperformed in 2022 due to weaker/ volatile revenue growth. The insurance regulator is taking steps to deepen coverage by offering flexibility to existing insurers and entry to new ones. Premium growth will be more critical in driving growth as margins levers have largely been extracted. Top picks are ICICI Pru Life and SBI Life.

Healthcare: Hospitals are likely to perform better than pharma and CDMOs on the back of new bed addition, higher occupancy rates and improving payor mix. India pharma market should perform well but US price erosion remains a risk for Generics. Among CDMOs, 2HFY23 could fare better as company-specific challenges wane and lower base kicks in boosting growth numbers. Hence, one has to be selective in pharma and CDMOs.

Industrials: Indian economy is seeing an uptick in the capex cycle driven by domestic factors. Order flows of most companies rose in double-digits despite Russia-Ukraine war, higher commodity prices. Execution pick-up should be the highlight of 2023 as projects are executed. L&T, Thermax and Concor are key beneficiaries of this in 2023. L&T is in a sweet spot as both India and Middle East businesses are looking bright. Concor should be a beneficiary of port cargo growth and road to rail shift from commissioning of the Dedicated Freight Corridor (DFC) project. Container volumes should recover as freight costs ease and container availability improves. Thermal captive power projects account for just 10-15% of Thermax’s revenues vs 50%+ in earlier years. 70%+ of orders are driven by green offerings. The change in business model points to margin improvement but is being under-appreciated by the market.

Lodging: Foreign tourist arrivals are still improving post Covid and there is broad-based revival in corporate/ government and group travel demand. Rising demand, coupled with low industry supply growth, should continue to support structural upturn in industry occupancies and pricing into 2023. Indian Hotels is the preferred pick in this space.

Property: The Indian residential property market upcycle is unlikely to be disrupted in 2023, even as it faces higher mortgage rates. Inventory levels should stabilize, though price appreciation of 5-10% is likely, unless large job losses happen, which seems unlikely. Office vacancies should start declining, though weaker IT hiring may impact sentiments on lease rentals. Developers should accelerate land spending. Godrej Properties, DLF, Sunteck and Embassy REIT are key picks.

Telecom Services: Indian telecom sector’s growth outlook is likely to be strong in CY23, driven by tariff hikes, 2G-to-4G adoption, and potential 5G up-tiering. However, rising cost pressures from network and S&M costs could offset some of the margin benefits of lower SUC (Spectrum Usage Charge) costs and operating leverage. Timing of tariff hikes and 5G adoption/pricing are key focus areas. Government may also favour rate hikes now that it owns 33% in Vodafone-Idea. Jefferies has maintained Hold on Bharti and Buy on Indus Towers.

Utilities: Five triggers for the power sector in the next 5-8 years: 1. Renewable energy rising 82% by FY30; 2. Thermal capex revival; 3. Transmission capex CAGR of 15%; 4. Wider and deeper distribution; 5. Green hydrogen ramp-up. Solar Energy Corp of India award should rise to 17-18 GW annually vs last 3-year run-rate of 12-15 GW. NTPC, Power Grid and JSW Energy are the top picks.

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