Indian stock market has more upside potential despite fair valuations, says Motilal Oswal; ITC, SBI among top picks

The Indian stock market remained resilient in the year 2023 amid weak global macros, rising interest rates, and geopolitical uncertainties. The benchmark indices, Sensex and Nifty 50 clocked eight successive years of positive returns and surged around 20% last year. The uptrend in the Indian stock market was driven by robust macro and micro factors, rebound in foreign fund inflows, strong domestic investors’ participation, alleviating concerns on political continuity, solid corporate earnings, and expectation of improving liquidity going ahead.

After the sharp rebound, the Nifty 50 now trades at a 12 month forward P/E of 19.6x, which is at 3% discount to its long period average of 20.2x. However, it is at 15% discount to the September 2021 high. Brokerage firm believes the Indian markets have further upside potential which will be a function of US Federal Reserve’s stance on interest rates and continued earnings delivery versus expectations in the near term.

Moreover, the market capitalization to GDP ratio is at 124% and the brokerage firm expects nominal GDP to increase 8.2% and 10.1% YoY in FY24 and FY25). “As CY23 was marked by multi year high interest rates, concerns about banking crises in the US and Europe, and geopolitical uncertainties, CY24 is likely to bring some moderation in these issues, especially on the interest rate front.

“With global liquidity tightening nearing its end, a healthy domestic macro and micro environment, strong domestic and retail participation, and expected political continuity post 2024 General Elections, bode well for policy momentum in India," Motilal Oswal said. Further, the country is currently experiencing the highest growth among major economies.

Hence, despite fair valuations, the above factors augur well with potential for further upside, it added. It anticipates continued optimism in the market and maintains a positive outlook and overweight stance on sectors such as BFSI, Industrials, Real Estate, Auto and Consumer Discretionary. Meanwhile, both midcaps and smallcaps made a strong comeback in the second half of 2023 and these indices outperformed largecaps by a wide margin.

Strong momentum in the economy, a pickup in government led capex and infrastructure spending, healthy order books, and a better earnings growth outlook have led to these sectors recovering from their lows and providing robust growth visibility. The 12 month forward P/E for mid caps is trading at 27.2x, at a 39% premium to its LPA.

Conversely, the 12 month forward P/E for small caps is trading at 20.9x, at a 7% premium to its LPA. “Given the positive growth outlook in these sectors, we believe that the optimism in the broader market will continue," Motilal Oswal said. Among largecap stocks, the brokerage said it likes , ITC, SBI, L&T, HCL Technologies, Titan Company, Ultratech Cement and M&M.

Among mid caps, it is bullish on , , , Metro Brands, Global Health, , Kirloskar Oil Engine, and Lemon Tree Hotels. Livemint tops charts as the fastest growing news website in the world to know more. Unlock a world of Benefits! From insightful newsletters to real time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away!.