By Deeksha Janiani
Indian stock markets had a turbulent ride in 2022. They braved a war, an economic slowdown, soaring inflation and the resurgence of Covid-19, all in the same year. It’s not a surprise that the index managed to generate returns of only 4% in the past year.
However, the picture looks brighter when you compare India with its global peers.
Showering praise on Indian markets, Nilesh Shah, Managing Director at Kotak AMC, said, “In the global sandstorm, we are truly an oasis in the desert.” The unassuming return that our markets generated in 2022 was all thanks to the underlying strength of our growing economy. Even the Managing Director at the IMF agreed.
However, global events and the resultant volatility saw the performance of key sectors in our equity markets diverge significantly. BSE Power, S&P BSE Industrials and Nifty FMCG were among the top 10 outperformers in 2022 in terms of returns, while Nifty IT and Nifty Realty took the undesirable trophies, topping the list of underperformers.
Winning themes of 2022: Capex revival and energy security
According to the International Energy Agency, the world faced its “first truly global energy crisis” in 2022. From Russia limiting gas supplies to Europe to the heat waves in India and China, energy supply was affected in most nations. These trends drove stellar returns for power and utility stocks.
Higher capital spends undertaken by the Centre and the likely pickup in private capex became another key theme for markets in 2022. Growing investments in the economy in H1FY23 gave a fillip to capital goods and defence sector stocks. The FMCG index was driven higher by the shift towards value stocks and higher out-of-home consumption.
Sectors sensitive to the interest rate cycle and those reliant on demand from advanced economies suffered in this calendar year. Barring the BSE IPO index, the Nifty IT sector was the worst performer in 2022, given the slowing top-line growth of top companies, their pricey valuations and higher attrition rates.
Nifty FMCG: Beverage and tobacco makers steer its performance
Stellar returns generated by ITC, Varun Beverages and Britannia drove the Nifty FMCG index higher in 2022. Healthy cigarette volumes and robust demand for beverages aided the stock performance of ITC and Varun Beverages.
Britannia surprised investors by growing its rural markets 1.5X faster than urban when other consumer staple players were struggling with rural volumes. FMCG players suffered in 2022 owing to muted volume growth and gross margin contraction. However, things are beginning to change on the ground.
The management of Parle, Dabur and Godrej Consumer have been seeing a healthy recovery in sales volumes from rural India since November. Easing inflation levels at the retail level and a good Rabi season so far are driving the rebound in rural markets.
Additionally, there is relief in sight as crude oil and palm oil prices have cooled off from their highs. Analysts expect the margins of top companies to improve going forward. Accordingly, they see profits growing faster than revenues in the next two years.
BSE Power: Heat wave energizes this index; power demand to be moderate in 2023
Adani Power emerged as the winning stock in the BSE Power index in 2022. Robust power demand and subsequent higher spot tariffs also aided the stock returns of state-run utilities like NTPC and NHPC.
Moody’s sees power demand moderating in the Asia-Pacific in 2023, in line with lower economic growth forecasts of key nations. In the context of India, ICRA sees domestic demand growing by just 5-5.5% YoY in FY24, much lower than the estimated growth of 7% for FY23.
Notably, players investing in the clean energy transition are likely to see a lot of action in the coming years. India aims to triple its green energy capacity to 450 GW by 2030. In line with these goals, Adani Green Energy seeks to scale up its capacity to 25 GW, a whopping 3.7X, by FY25. Analysts see this company clocking the highest growth among large players in the next two years.
BSE Industrials: Defence stocks perform well as Centre’s capex spends pick up pace
China’s shadow loomed large over the defence sector, and defence stocks like Hindustan Aeronautics and Bharat Electronics were on a roll in 2022, as the Centre accelerated its capex spends in line with its higher budget. It utilised most of its capex on road and highways, defence projects and railways. The higher proportion of fixed investments in H1FY23 also boded well for capital goods stocks like Timken India, Cummins and AIA Engineering.
The order pipeline among defence players continues to remain strong in the near term. Other industrial players like Timken India and Cummins will benefit from higher investments in rail infrastructure and data centres respectively. Cummins is also seeing good demand for its gensets from user industries like manufacturing, commercial realty, pharmaceuticals and biotechnology.
Trendlyne’s Forecaster sees Timken India clocking the highest top- and bottom-line growth among the large players between FY22-FY24.
Nifty IT: Winner of 2021 turns loser in 2022
In a major change of fortunes after the bumper years of 2020 and 2021, the Nifty IT index witnessed intense selling pressure, especially among FIIs, in 2022. Wipro emerged as the worst performer of the index and in the Nifty 50 in the past year. Other notable underperformers were Tech Mahindra, LTIMindtree, L&T Technology and Mphasis.
The IT sector continues to face challenges in its near-term growth as the pace of spending and decision-making slows among clients based in the US and Europe. Julie Sweet, Accenture’s chief executive officer, recently commented on this situation in the company’s quarterly earnings call – “Customers are more and more focused on cost resilience and many of them are having to make really hard choices.”
Trendlyne’s Forecaster sees the revenue growth of all major IT sector players moderating sharply in FY24.
Nifty Realty: A contradictory tale of index losses and record housing sales
Pricey stocks like Macrotech Developers and Godrej Properties pulled the Nifty Realty index down in 2022. The returns generated by other top stocks were nothing to write home about either. The commencement of a new rate hike cycle in May 2022 made the market cautious about the prospects of this sector.
Contrary to the market’s fears, housing sales continued to be strong in the top seven Indian cities until September 2022. The demand was fueled by mid, premium and luxury housing segments, according to Anarock.
However, Anarock sounds cautious about this strong demand sustaining in 2023. If home loan rates rise beyond 9.5% (current range: 8.5-9.5%), it could adversely affect the demand from the affordable housing segment. Additionally, a deeper slowdown in the IT sector could negatively impact residential sales in 2023.
2023 might be tough on Indian markets, but analysts upbeat on financials and industrials
Foreign brokerages like Goldman Sachs and Jefferies see the Indian markets underperforming the broader emerging markets in 2023, given their pricey valuations. Even domestic brokerages like HDFC Securities expect muted returns for our markets in the coming year.
Morgan Stanley, Bank of America and Goldman Sachs are positive on the banking, industrials and consumer discretionary space in Indian markets. Robust credit growth and strong chances of revival in the private capex cycle bode well for the former two, analysts are divided on the FMCG/consumer staples space. BNP Paribas sees FMCG stocks correcting in 2023 given their high valuations and relatively lower growth forecasts. However, Jefferies remains bullish on this space. Most analysts are bearish on IT, energy, consumer durables and NBFC sectors in 2023.
Indian markets surprised everyone with their resilience in 2022. It will be interesting to see their trajectory in 2023 as the global challenges of this year may intensify.