IT, pharma, infra stocks: Key sectors to look at after Q4 results; factors to guide D-St in FY24

India equity markets continue to move higher even as the busy Q4 results season is over. Investors are busy in bargain buying as Dalal Street looks for the cues beyond the earning season. Traders are looking at the key triggers that will push the markets to new highs.

Analysts believe that factors including monsoon, inflation numbers, rate cuts by the central banks, recession fears, government policy, state assembly elections and upcoming general elections are among the key factors that will guide the mood of the markets in the upcoming one year.

India Inc's Q4 report card
For Indian Equities, Q4FY23 revenues were largely in-line with expectations, and EBITDA were above expectations, said analysts. In Nifty, strong earnings growth (was seen in automobiles, telecom, FMCG, and financials while substantial contraction was recorded in Metals, Cement followed by pharma and power.

Q4 corporate earnings was a mixed bag with weak numbers from commodity names led by metals and chemicals. On the other hand, infrastructure plays such as pipes and construction delivered robust numbers, said Kunal Bhakta, Co-founder at First Water Capital Fund.

Most companies that we track came out with in-line or better-than-expected results. Corporate earnings were driven by Financials and Auto, while Metals dragged aggregate profitability. Several companies reported their highest earnings growth in the last four quarters, said Darshan Engineer, Portfolio Manager, Karma Capital.

What is in line for D-st?
Not only upbeat Q4 numbers, strong FII inflows, attractive valuations, positive guidance from the management, strong global cues are also supporting the action at Dalal Street. However, there are select factors that can guide the action at Dalal Street in the months to come.

Morgan Stanley has set a Sensex target of 68,500 by December 2023, suggesting an upside of more than 5,500 points, or about 9 per cent, from its current levels around 63,000. The global brokerage firm has assumed no major surge in commodity prices, no recession in the US economy and supportive government policy back home, in its research.

There is some expectation of a rate cut by the RBI in the September quarter and that is something for markets to watch out for. A few key states will also go in for Assembly polls in this year 5-6 months and how the ruling party fares in these states will also be a key monitorable, said Bhakta.

Amid a challenging global macro backdrop, India Inc saw healthy profitability in Q4FY23. Over the next few quarters, we have a few state elections followed by national elections which should lead to increased volatility. Hence, we expect action to be stock specific going ahead, said Engineer.

Monsoon is another key factor that will guide the markets in the near-term, especially after the El-Nino effect. The rainy season is a bit delayed to enter India, but the Indian Meteorological Department (IMD) expects the Monsoon to hit the southern tip in the next 2-3 days. India is an agriculture-driven country, whose about 60 per cent population is dependent on the primary sector.

Sectors to watch out
In the last one decade, India has gained positions in the world order with significant positive consequences for the macro and market outlook, said market experts. They believe that India is likely to continue the momentum as the broader market continues to remain firm.

"We expect a confluence of cyclical and structural tailwinds to drive growth momentum. We expect growth to track above 6 per cent in the next two years, supported by strength in domestic demand. We expect macro stability to improve and to pave the way for a shallow rate cut cycle from 1Q24," said Morgan Stanley.

Engineer from Karma Capital Is positive on sectors like auto, pharma, and communications where there are good tailwinds in the form of lower raw material prices, steady demand for their products and services, and reasonable valuations. On the other hand, he said that IT and FMEG are expected to see demand headwinds for a few more quarters due to weak demand.

On the contrary, Bhakta from First Water Capital, infrastructure plays continue to be in a sweet spot and remain attractive. Beaten down sectors such as IT and Pharma present some interesting opportunities as well.

For FY24 & FY25, Metals, Pharma, IT, Power and Industrials saw more downgrades while Financials, and FMCG were majorly upgraded. For FY24, Adani Ports, Tata Steel, Cipla, UPL, and Apollo Hospitals were significantly downgraded. Higher upgrades were seen in Tata Motors, Kotak Bank and Grasim, said Philip Capital in its report.