Ambit Capital said that fair value for Nifty is 20,900 by FY24 end, considering March-24 earning yield-bond yield (EYBY) gap. It says that it prefers large-caps over small-cap and mid-cap stocks.

“Nifty fair valuation rises to 20,900 using 7.1 per cent G-Sec yield and March-24 EPS of ₹940 (vs consensus’ ₹991).” it said.

The investment advisory firm has added SBI Cards, Indigo, Affle, Max Healthcare and IndiaMart into its portfolo, while excluding LIC Housing Finance, GCPL and Bank Nifty.

Rate-cut hopes

Nifty upside target is possible if yields sustain at lower levels or March-24 earnings are higher than expectations, Ambit said, adding that “the latter appears unlikely.”

Ambit said banking NIMs would reduce and any decline in policy rates in second-half of FY24 can put more pressure. The overnight index swaps (OIS) curve highlights the possibility of rate cuts over the next few months. Also, the US Fed and the ECB will contract bond supply, impacting liquidity, though India stands out in comparison to peers on macros and can outperform peers, it further said.

“We reduce our 10-year yield assumption from 7.3 per cent as overnight index swap (OIS) curve, real rate and repo G-sec spread indicate yields will stay benign. But we see risk to earnings as the growth engine of Nifty ”BFSI” will slow down in FY24, with contribution to incremental EPS growth tapering (43 per cent) and risks to earnings of IT, Oil & Gas (Reliance) and metals remain,” it cautioned.

Challenges for Reliance, metal

“Tech earnings” remain with expectation of revenue growth normalisation to pre-Covid period. However, delay in China recovery can hit Reliance and metal earnings, it further said.

Ambit Capital’s mid- and small-cap allocations are 12 per cent/5 per cent and cash allocation is 5.2 per cent. “While we retain overweight on banks, we recommend reducing weight as valuations aren’t as cheap as in May-22 and book yield bond yield differential model suggests muted one-year returns,” it advised.