Though Nifty Is at the highest level, Valuations far more reasonable now than that in Oct’21 high: Motilal Oswal

Level up: #19K – Nifty-50 hits its highest teen!

Valuations more sober today than in Oct’21

It is a rough road that leads to new peaks!

 After a roller-coaster ride of 18 months, Nifty-50 finally surpassed its all-time high and touched 19K mark in Jun’23. The feat was not at all easy! Nifty’s journey from 18K to 19K took 425 trading days (from Oct’21-Jun’23) vs. only 30 days when it covered the journey from 17K to 18K.

 Post-strong recovery in the Indian economy and corporate earnings in FY22, FY23 was hit by a multitude of headwinds that dragged down Nifty on multiple occasions. These widespread challenges ranged from geopolitical tension (led by Russia-Ukraine conflict), spike in commodity costs to multi-year highs (adversely impacting corporate margins), sharp rate hikes by global central banks, supply chain disruptions (Covid-19 restrictions in China), to consumption slowdown in 2HFY23 and cumulative FII outflows of ~USD26b (over Oct’21- Feb’23).

 Despite these obstacles, however, Nifty-50 managed to recover from its Jun’22 and Mar’23 lows, mainly fueled by all-time high DII inflows of USD47b during the same 18-month period, recovery in FII flows post Mar’23 and healthy corporate earnings delivery in 4QFY23.

What drove the Nifty to the new high?

 The recent rally in Nifty-50 has been led by strong combination of healthy macro and micro, complemented by sharp recovery in FII flows.

 Strong GDP growth of above 7.2% in FY23, moderating inflation (with headline CPI inflation falling to a 25-month low at 4.3% in May’23), narrowing of CAD (to 0.2% of GDP in 4QFY23), stable crude prices, stable exchange rates and global interest rates nearing its peak, are some of the key macro drivers. Conversely, solid growth in corporate earnings (Nifty earnings up 10% in FY23 on a high base of 34% in FY22) and expectations of high-teens earnings CAGR over FY23-25E has kept the sentiment buoyant.

 MOFSL Universe posted an earnings CAGR of 26% to reach INR8.3t over FY20- 23; whereas Nifty-50 posted an earnings CAGR of 22% to reach INR6.3t during the same period. The earnings momentum is likely to remain strong going ahead with MOFSL/Nifty-50 earnings projected to clock 19%/17% CAGR over FY23-25.

 Flows: After reporting cumulative outflows between Oct’21 and Feb’23, FII flows bounced back strongly in the last four months, with cumulative inflows of USD14b over Mar-Jun’23 while DII flows continued to remain positive at USD4b during the same period. The recent recovery in FII flows has pushed the index to an all-time high level. As of CY23YTD, FII inflows stand at USD9.7b whereas DIIs remain net buyers with inflows of USD10.5b.

 Nifty-50 has gained 13% from Mar’23 lows and touched an all-time high in Jun’23. We note that as of 30th Jun’23, Nifty-50 was up 4% and 2% from its Oct’21 and Dec’22 highs, respectively.