India Market Update – May 2024

Key Takeaways

Indian Equity Market experienced significant volatility around the result of Lok Sabha Election 2024. A day before the election results, on 3rd Jun 2024, the Nifty 50 index hit an all-time high of 23,338.70 following exit polls predicting a solid majority for Modi’s Bharatiya Janata Party (BJP) led National Democratic Alliance (NDA).1

On election day, Indian markets experienced a dramatic reversal, reversing gains seen on Monday 3rd of June 2024 due to disappointing early trends emerging from election results which diverged significantly from the upbeat predictions of exit polls. This turn of events surprised the investor community, leading to a panic-driven sell off which saw the Nifty 50 fall by 8.5%.2 Eventually, the Nifty 50 recovered slightly from the day’s low as it became apparent that despite the BJP not getting a majority on its own, the BJP-led NDA would.

Since then, the Nifty 50 index has made substantial gains, climbing roughly six percent since election results day.3 India has seen an era of coalition government before and earlier NDA/UPA-led governments have had a reasonable track record. It is likely that markets believe a coalition-run government will not stall policy momentum and the overall India growth story. Major reforms such as the implementation of GST and the JAM trinity (Jan Dhan accounts, Mobile numbers, and Aadhaar cards) are already ingrained in the system. While the focus of the government may shift towards job creation and the rural economy, it is likely that support for manufacturing with the Production Linked Incentives scheme (PLI) and general infrastructure will continue.

The Nifty 50’s earnings per share (EPS) for FY24 increased 22% from Rs. 828 to Rs. 1013, largely fuelled by notable upgrades in Auto, Financials, Consumer, Industrials & Material sectors. EPS for FY25E & FY26E also experienced upward revisions of 0.8% and 1.34% each to Rs. 1,118 and Rs. 1,298 respectively. We now expect the Nifty 50’s EPS to rise at an 18% CAGR for FY23-26E, and a 24% CAGR for FY20-25E respectively.4

Recapping the index’s performance for Q4 FY2024:

Corporate earnings were robust with broad-based outperformance across various sectors. Strong gains could be attributed to domestic cyclicals such as autos, financials, healthcare, capital goods and cement industries. However, global cyclicals such as the metal and oil & gas sector were detractors.

Sector Updates

  • The banking sector reported healthy performance in Q4FY24, driven by strong business growth and controlled provisions. Net Interest Margin (NIM) performance was mixed, but many banks saw margin improvements. Credit growth was healthy, supported by demand in both retail and Micro, Small & Medium (MSME) segments.
  • The automobile segment showed growth moderation across a majority of its categories so far in FY25. Consumer companies are focusing on the traditional framework (distribution reach, product launches, consumer offers, etc) to regain the growth momentum. This sector posted a revenue growth of 4% YOY in Q4FY24.5 While demand trends were largely stable, many companies saw a recovery in rural areas towards the end of quarter. Management commentaries for FY25 look promising, with expectations of recovery in sale volumes.
  • Industrials and capital goods sectors reported significant growth after benefiting from increased infrastructure spending and government initiatives. This trend is expected to continue. Cement demand was particularly strong in Q4FY24 led by sustained investment in government-led infrastructure projects, real estate and increased pre-election spending. However, this may moderate in the first half of FY25.
  • Major expansions for Oil Marketing Companies (OMC) may conclude within the next two years, paving the way for growth. City Gas Distribution (CGD) remain positive about healthy volume growth and margins, as spot liquefied natural gas (LNG) prices remain modest.
  • In the telecom sector, the market share shift continues in favour of Bharti/RJio and the recent 5G ramp-up has not contributed meaningfully to revenue growth. Hence, the sector registered a sequential revenue growth of 2%, led by 1.5% increase in subscribers.
  • IT companies remain cautious for the near-term demand environment as demand from discretionary projects remains weak. The management teams indicated that the reprioritization of projects and execution deferrals on discretionary areas continue to exert material pressure on revenue conversion. The strong deals won in FY24 along with early signs of recovery driven by IT consulting, bode well for expected growth in FY25. There might be some room for margin improvement in FY25.

Stock Specific Updates

  • HDFC Bank is displaying signs of breaking out from a prolonged consolidation period and has successfully breached its previous month peak of 1,570 levels. The bank’s shares have gained in the last month as brokerages expect the bank to benefit from the upcoming MSCI rejig in August.
  • Mahindra & Mahindra has surprised the street with the next phase of its strategic growth plans that it unveiled at its recent annual investor day event. The outlook for M&M’s automotive segment is optimistic with the company focusing on new launches.

Valuations

  • As of Jun 12, 2024, the valuations of the Nifty 50 index are at 21.32x, which is at a slight discount of ~0.9% compared to its 5-year average of 21.52x. With the relatively better earnings and profitability seen in FY2024, large caps now seem to be relatively reasonably valued.

Source: Bloomberg data as of 12th Jun’24. The sector(s)/stock(s)/issuer(s) mentioned in this presentation do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer.

Related Funds

NDIA: The Global X India Nifty 50 ETF (ASX: NDIA) invests in 50 of the largest companies listed in India.