Use the Correction to Build a Strong Portfolio Says Phillip Capital; Here are his top picks

brokerage company Philip Capital advises investors to take advantage of the market correction to build a strong portfolio over the long term as India’s long-term growth prospects remain intact.

However, it added that the economy will go through a period of weakness and consolidation in fiscal year 2023-24 (FY24) due to the higher base of the past two years, steeper interest rates and a global slowdown.

Phillip Capital has a Nifty target of 18,500-19,500 for March-September 2024.

“For India, we assign our Nifty50 FY24-25 earnings estimates a price-to-earnings ratio of 18-18.5 (assuming a 6 percent discount to current earnings per share growth estimates of 18 % and 15% in fiscal year 24). and FY25 respectively) and forecast a Nifty target of 18,500-19,500 for March-September 2024,” said Phillip Capital.

“While the Indian economy should fundamentally be on strong footing in FY25, the return of an impressive BJP in the 2024 election and a controlled inflation and interest rate environment may propel markets higher (19,500-20,000),” the brokerage firm said.

The brokerage firm said supportive government policies and the long-term potential of the Indian economy continue to bode well for capital accumulation, but other GDP components such as consumption and exports may weaken in FY24.

Accelerating growth from FY25

For FY24, Phillip Capital estimates India’s GDP growth at 5.5-6 percent and CPI inflation at 4.8-5.2 percent (assuming stable commodity prices).

From FY25, the brokerage firm expects GDP growth to be 6.5 to 7 percent plus, while the consumer price index (CPI), or retail inflation, could fall back to the RBI’s comfortable level of about five percent.

The brokerage firm also expects lower interest rates, a stronger currency, higher capital flows and continued government and RBI policy support that will provide a significant boost to Indian equities from FY25.

Phillip Capital believes that manufacturing, exports and capital spending (public and private) could do well over the long term and lead to more employment and more consumption.

The brokerage firm added that the company’s earnings are currently forecast to be extremely high, but some disappointments and cutbacks could lie ahead.

The brokerage firm said calendar year 2023 will see an economic slowdown as elevated inflation and rising growth will lead to further interest rate tightening, followed by interest rates being kept high for longer.

As a result, equities are likely to remain under pressure in the short to medium term. However, if Indian and global central bankers declare interest rate peaks at current levels, equities will respond positively, the brokerage firm said.

“While medium-term challenges will weigh on equity returns across the board, we remain positive on cyclicals versus discretionary from a longer-term perspective; Sector preference – Industrials, Cement, Defence, Financials and Logistics,” said Phillip Capital.

Phillip Capital said it assessed the performance of equities and FII (foreign institutional investors) flows when interest rates were near their previous peak (2018-19).

“During this period, markets corrected sharply before peaking and rallied after interest rates stagnated. During this period, FIIs were net sellers but became buyers after the interest rate spike. The differentiating factor this time around is that the tightening has been faster and more extensive,” the brokerage firm said.

Positives and negatives for the Indian economy and stocks

Phillip Capital highlighted three key positives for the Indian economy and equities:

(1) Continued focus on indigenization, exports (through PLIs) along with alternative technologies.

(2) Government policy: innovative, long-term vision, multiplier benefits, timely execution.

(3) Rising public and private investment spending led by higher long-term demand to achieve a multiplier effect.

Phillip Capital also highlighted five key negatives for the Indian economy and stocks:

(1) Volatile FII flows assuming further tightening.

(2) Higher interest rates due to continued inflation and global tightening.

(3) Softer demand scenario, impacted by higher base, inflation and interest rates.

(4) Discretionary consumer spending is trending down.

(5) Global slowdown and liquidity constraints.

The brokerage firm anticipates mixed corporate earnings and stable corporate margins. It said inflows from DII (domestic institutional investors) have been decent or even strong so far, but future trends may be mixed as debt offers an attractive investment opportunity.

Higher commodity prices, persistent inflation, strong negative impact on growth, geopolitical factors, poor execution and decision making ahead of elections by the Indian government are the main risks to the Indian economy and market, said Phillip Capital.

Phillip Capital’s top picks

L&T, Siemens, Thermax, HAL, Bharat Electronics, UltraTech Cement, Shree Cement, JK Lakshmi Cement, ICICI Bank, HDFC Bank, Axis Bank, BAF, CIFC, SRF, HUL, Britannia, GCPL, ITC, M&M, Maruti Suzuki, Tata Motors, SAIL, Tata Steel, Infosys, LTIMindtree, Persistent, Trent and Shoppers Stop, Orient Electric, Finolex Cables and PG Electroplast.

Disclaimer: The views and recommendations contained in this article are those of the brokerage firm. These do not represent the views of MintGenie.

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