Risk Reward Is Favourable For Indian Stocks, Says Citi Research
The brokerage prefers large caps over mid caps.
The risk reward remains favourable even as the premium valuations limit upsides for Indian stocks, according to Citi Research.
India is trading at one standard deviation above mean premium to emerging markets and close to long-term mean premium to the U.S., the brokerage said in a note on Wednesday.
Rural recovery, capital expenditure cycle and credit growth are key themes for investments in 2023, according to Citi.
The premium valuations limit upsides, it said. Citi Research expects a Nifty target of 18,500 in March 2024, with 17.5 times forward earnings-based price to earnings ratio.
The research agency also listed foreign and domestic flows, large caps and a challenging 2023 global macro with potential recession among the top five themes for 2023.
Rural Recovery
Citi Research said the nominal rural wage growth momentum was at a two-year high and the real rural wage growth momentum was positive. Rural recovery has been depressed and volatile over the past two years.
"Rural labor market trends have been sequentially healthy, especially rural wage growth momentum and could benefit rural consumption going forward," Citi said.
Urban consumption may normalise in 2023 due to exhaustion of excess savings channels. The urban-to-rural consumption momentum shift is still not decisively evident in activity data, but rural recovery is more apparent now in the labour market data, it said.
Citi economists remain conscious of the risk from near-term weather-related shocks and lack of a "rural boost" in the budget, it said.
Recovery In Consumer Staples
According to Citi, the demand for consumer staples could rebound. "We are watching for any price cuts to support rural demand growth as pressures on gross margins abate."
The brokerage maintained a 'neutral' stance on this sector.
Credit Growth And Capex Cycle
Citi said there had been a broad-based pick-up in credit growth with a "resilient" growth in bank credit.
Considering the marginal cost of funds-based lending rate, loans have repriced faster than liabilities for banks, which has contributed to the expansion of the net interest margin in the first half of the current fiscal. The NIM trajectory of banks is expected to moderate in 2023, it said.
The brokerage predicted that public capex in 2022–23 would reach its highest level since fiscal 2009. The public capital expenditure will most likely continue in the pre-election year.
According to Citi, private sector capex intentions remain resilient with healthier corporate balance sheets.
A gradual pick-up in the capex cycle will be driven by falling input prices, rising domestic capacity utilisation and supply chain relocation on account of the China Plus One strategy. The number of new private projects announced last December were the highest since the fourth quarter of fiscal 2009, it said.
The risk-off may pressure foreign flows, while domestic flows are likely to stay resilient. Assets under management inflows into the domestic mutual funds remain resilient, said Citi.
According to Citi's forecasts of the growth in the gross domestic product, rolling country-level recessions are expected across the world through 2023.
Overweight And Underweight Rating
Citi maintained an overweight rating on banks, PSU utilities and industrials, while they are underweight on consumer discretionary and IT services. It has recently upgraded the cement sector to neutral.
The brokerage prefers large caps over mid caps.
Top Sectorwise Picks
Citi's Top Theme-Based Picks
Rising affluence to fuel consumption and premiumisation in consumer staples.
Stock Idea: Hindustan Unilever Ltd.
Point-of-purchase trinity to drive discretionary growth.
Stock Ideas: Jubilant FoodWorks Ltd., Devyani International Ltd. and Titan Co.
Premiumisation, electrification and low base should aid autos.
Stock Ideas: Mahindra & Mahindra Ltd. and Maruti Suzuki India Ltd.
Financials: Long runway for penetration across products; prefer private sector over public sector.
Stock Idea: ICICI Bank Ltd.
Insurance:
Stock Idea: SBI Life Insurance Co.
Private capex: Healthier cash flows equals higher ability to invest for growth.
Domestic manufacturing: Emerging growth engine.
Stock Idea: Larsen & Toubro Ltd.
Renewed public-spending focus on infrastructure.
Stock Idea: Larsen & Toubro Ltd.
Defence is riding on twin themes: Indigenisation and modernisation. Stock Idea: Bharat Electronics Ltd.
Pharmaceuticals: Domestic and emerging market growth opportunities.
Stock Ideas: Sun Pharmaceutical Industries Ltd., Torrent Pharmaceuticals Ltd.
Hospitals: Significant headroom to grow.
Stock Idea: Apollo Hospitals Enterprise Ltd.
China Plus One opportunities in chemicals.
Stock Ideas: PI Industries Ltd., SRF Ltd.
India's energy mix is set to get cleaner.
Stock Idea: NTPC Ltd.
Natural gas as "transition opportunity".
Stock Ideas: Indraprastha Gas Ltd., Gujarat State Petronet Ltd.
IT Services: Secular, resilient growth and employment creation and spotlight on the Global Industry Classification Standard.
Stock Idea: Infosys Ltd.