Indian equity markets have fallen more than 5 per cent this year amid uncertainty, rising geopolitical scare and prospects of the US Federal Reserve raising interest rates sharply. The market was jolted by Russian President Vladimir Putin’s decision to launch a special military operation in Ukraine. The threat of a possible escalation in Eastern Europe due to the war has investors on edge. The recent market correction has given investors the opportunity to build a strong portfolio by adding stock of companies where the earnings visibility remains solid, pricing power is healthy, and valuation is attractive. Brokerage firm Motilal Oswal Financial Services remains biased towards large-caps including HDFC (Housing Development Finance Corporation), SBI (State Bank of India), Wipro, HCL Technologies, L&T, and Tata Motors, among others.
Corporate earnings resilient, add quality large caps
According to the analysts, post the recent correction, the Nifty is currently trading at 19x 12-months forward P/E, slightly lower than its 10-year average for the first time since November 2020. Corporate earnings have remained resilient. “Healthy earnings visibility can act as a cushion in an otherwise fragile external situation. If the Russia-Ukraine conflict elongates and leads to elevated energy prices for longer, it may impact earnings estimates,” they said.
While around two-third of Nifty earnings are insulated or benefit from elevated energy prices (IT, BFSI, Metals, O&G), one-third is impacted negatively (Consumer, Auto, Cement, Pharma, and Telecom). If the crisis in Ukraine prolongs, it could lead to a cut in the earnings estimate of Nifty 50 companies due to the impact of higher energy costs.
Stocks to buy during ongoing market turmoil
Preferred large-cap ideas which have corrected 10-20% from the 52-week highs
HDFC
State Bank of India
Wipro
HCL Technologies
Larsen & Toubro (L&T)
Tata Motors
HDFC Life Insurance
Dabur India
Godrej Consumer Products
Apollo Hospitals
Gland Pharma
Macrotech Developers
Preferred mid/small-cap ideas which have corrected 20-30% from the 52-week highs
Canara Bank
Jubilant Foodworks
SAIL
Ashok Leyland
Dalmia Bharat
Zee Entertainment
Whirlpool India
ICICI Securities
GR Infraprojects
Zensar Tech
Mahanagar Gas
Transport Corporation
Investors can use the correction to add quality stocks to their portfolio. Motilal Oswal’s portfolio construction is premised on stocks where the earnings visibility remains solid, pricing power is healthy, and the recent correction has led to moderation in valuation. The brokerage continues to remain biased towards large caps.
External risks continue to rise as the Russia-Ukraine conflict spooks the market
Global risk-off; higher crude prices: Key concern for India: Motilal Oswal’s recent note highlighted that rising external risks like higher global inflation and potential rate hikes by the US Fed can be some of the key risks for Indian share markets. The Russia-Ukraine conflict has resulted in a global risk-off, with equity markets undergoing bouts of correction and heightened volatility. The uncertainty over the duration and magnitude of the conflict could keep the market jittery and dependent on news flow in the near future.
“From India’s viewpoint, a sharp spike in crude oil prices poses key risks on the external balance front and can play spoilsport with the assumptions made in the FY23 Union Budget. While these are early days into the conflict, higher crude oil prices, if sustained for an elevated duration, can result in higher inflation, current account deficit, bond yields, and interest rates in India and thus impact macro-economic stability,” the brokerage said.
FII outflow continues: FIIs continue to remain net sellers in India as the global risk-off sentiment and the geopolitical situation added to concerns of inflation, higher bond yields, and global rate hikes, according to Motilal Oswal. Since October 2021, FIIs have offloaded shares worth $14.1 billion in the Indian market. This has been offset by DII buying of $16 billion over the same period.
Nifty correction masks sell-off in the broader market: While the Nifty is down 10% from its October 2021 peak, the broader market has seen a much sharper sell-off. According to the brokerage report, of the NSE 500 constituents, 37% of the stocks are trading over 30% lower from their respective 52-week highs.
“Nearly half of the Nifty constituents are now trading at valuations that are at a discount to their respective 10-year average, while one-third is trading at a premium of more than 10%, demonstrating the two-faced nature of the index on valuations,” analysts at Motilal Oswal said.
(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)
