Nomura, a global financial services group, sees Indian market delivering mid- to high-teen corporate earnings growth over the next five years even as it set December 2022 Nifty50 target at 18,150, based on 18.5x multiples on Dec-2023 earnings.
On the other hand, UBS, a global investment advisory firm, expects Nifty to touch 16,000 by this year end due to expensive valuation. The valuation multiple of 18.5 x is lower than the current 21x due to expectation of tighter liquidity conditions and slowdown in earnings growth beyond FY2023-24, Nomura said in its India equity strategy outlook 2022.
The pandemic has accelerated the earnings recovery process due to market share gains by large players, lower operating costs and higher commodity prices. In addition, the impact of corporates undertaking structural measures on costs and capital allocation in response to falling profitability have also aided the recovery process, the Nomura research report said.
“The much-awaited rise in corporate earnings to GDP is playing out as earnings growth outpaces economic growth. Over the next 12 months, we expect the market to focus on earnings growth beyond FY24. “With an improvement in profitability playing out, growth beyond FY24 will depend increasingly on the broader economic growth”, it added.
Nomura is underweight (UW) on domestic and global cyclicals and overweight (OW) on defensive names. “We are OW on IT services, telecom and healthcare as we expect growth outlook and earnings to be revised higher. In consumption, we prefer staples (low growth expectations) over discretionary. We prefer auto ancillaries (play on EVs) over OEMs. We are OW on infra/construction, considering the policy focus on investment-led growth and India’s digitisation opportunity. We are selective in financials, with a preference for large private banks with lower valuation, insurance and housing finance NBFCs.
We are UW on metals and Neutral on oil and gas”, the research report said.
“Despite our expectations of double-digit earnings growth in FY23E/FY24, we think equity upside is capped by expensive valuations. Household flows have supported equities in the absence of FII flows and households could start unwinding their US $300 billion of “extra” savings (third Covid-19 wave could delay this by a couple of months). This would soften their flows into equities (both direct and via mutual funds),” it said. UBS said it is overweight on private banks, cement, real estate and select auto names and underweight on IT services, consumer staples and metals.