Morgan Stanley cuts FY23 earnings forecast by 8%; lowers Dec Sensex target

In a bull-case scenario (30 per cent probability), Morgan Stanley expects the Sensex to hit 75,000 by December 2022-end and sees the 30-share index at 45,000 by the year-end in a bear case scenario

Morgan Stanley has cut its forecast for corporate earnings growth for fiscal 2022-23 (FY23) by 8 per cent amid the sharp rise in oil prices, which it said could fuel inflation and cast a shadow on how India Inc performs over the months ahead. All this, it said, will also impact economic growth in FY23. SEE EARNINGS FORECAST TABLE HERE
 
“Indian stocks have held up remarkably well despite the rise in oil prices, possibly due to a combination of a change in macro funding mix to FDI, falling oil intensity in GDP, high real relative policy rates and a strong domestic bid on stocks. That said, the length of the military action in Ukraine could determine its impact on earnings and multiples. FY23 earnings estimates have been cut by 8 per cent to reflect lower GDP growth forecasts,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi and Nayant Parekh.

 
It has also slashed its December-2022 Sensex target by 11 per cent – from 70,000 (base case; 50 per cent probability) earlier to 62,000 now. This still is nearly 11 per cent higher from the current levels. CHECK BULL-CASE, BEAR-CASE, BASE-CASE SCENARIO HERE
 

For its base case Sensex target, Morgan Stanley has assumed that the ongoing Ukraine-Russia conflict will end in weeks, Sensex earnings compound 22 per cent annually over FY22-24, and future COVID-19 waves do not result in a major economic disruption. That apart, it expects the government policy to remain supportive and the Reserve Bank of India (RBI) undertakes a calibrated exit.

 
In a bull-case scenario (30 per cent probability), Morgan Stanley expects the Sensex to hit 75,000 by December 2022-end and sees the 30-share index at 45,000 levels by the year-end in a bear case scenario to which it has attached 20 per cent probability.


 
Ober the past two trding sessions, the markets have rebounded sharply - in line with their global peers - on hopes of de-escalation of the Russia-Ukraine conflict, after the Ukrainian President Zelenskyy indicated on Wednesday that the country was no longer interest in NATO membership, the main reason behind the war.

 
Sectors to bet on
 
Markets, according to a note by BofA Securities, have been volatile post peaking in October 2021, with nine distinct cycles of corrections (five cycles with 6.3 per cent average fall) and recovery (four cycles with over 5 per cent average returns) since then.


 
"Our bottom-up analysis revealed, benchmarked to Nifty, on an average, Industrials (+3 per cent), Discretionary (+2.3 per cent), Cement (+1.4 per cent), Metals (+0.9 per cent) & IT (+0.1 per cent) delivered higher returns during Nifty recovery cycles. Cement (-2 per cent), Industrials (-1.4 per cent), Autos (-1.1 per cent), Financials (-0.6 per cent) saw most correction as Nifty corrected," wrote Amish Shah, head of India Research at BofA Securities in the note.

 
On the other hand, those at Morgan Stanley are overweight Financials, Consumer Discretionary and Industrials and underweight Utilities, Energy and Materials sectors. FULL LIST HERE
 
"In defensives, we double upgrade Technology and go underweight Consumer Staples and stay underweight on the Healthcare sector," Desai wrote in the coauthored report.