Brokerages raise India targets

Goldman Sachs increases its 12-month Nifty target from 7,600 to 8,300, implying a 14% upside from current levels

It’s raining upgrades for India’s equities markets. With the Narendra Modi-led Bharatiya Janata Party (BJP) set to form the central government after a landslide victory, several foreign brokerages have raised price targets for the country’s benchmark indices by as much as 15 per cent over the current levels.

US-based Goldman Sachs has increased its 12-month target for the National Stock Exchange’s Nifty from 7,600 to 8,300, implying a 14 per cent upside from the present level. Japan’s Nomura has raised its year-end target for BSE’s Sensex from 24,700 to 27,200. While Citibank has increased its target to 26,300, Deustche Bank, which believes India is “at the cusp of a structural bull market”, expects the Sensex to top 28,000 by December.

In sync with the broking houses’ optimism, the Sensex on Monday closed at a new all-time high of 24,363, up 241 points over its previous close, while the 50-share Nifty ended 60 points higher at 7,263. “We retain our overweight stance on India and roll our 12-month Nifty target to 8,300 from 7,600 earlier; this implies a 15 per cent upside and 15x forward P-E (price-to-earnings). While we think the returns will largely be led by earnings, there might be a valuation overshoot amid strong inflows in the near term, as the market gets optimistic about the economic growth recovery,” said a Goldman Sachs report.(MARKET MONITOR)

Most analysts are pinning their hopes on the BJP, which, after a decisive mandate, is expected to push reforms and address major macroeconomic challenges facing the nation. “The National Democratic Alliance (NDA), led by Modi’s BJP, has won decisively. And, India’s equity markets could have struck gold. This victory should offer India five years of decisive governance, more market-based and friendly economics, and a focus on growth, jobs and investment. The market run has more legs,” Aditya Narain, managing director and India strategist at Citigroup Global Markets, said in a report.

Most brokerages have re-rated the Indian market, believing it can trade at earnings multiples 200-300 basis points higher than their long-term average of about 14 times.

Besides aggressively raising the price targets, another common theme across brokerages is a clear shift from defensive bets like pharmaceuticals, technology and consumer goods to domestic cyclicals like banking, infrastructure, real estate and energy.

Jyotivardhan Jaipuria, head of research at Bank of America Merrill Lynch says domestic plays will outperform exporters over the next 12 months. “Three themes drive our sector preferences — high-quality cyclicals, reform plays and beaten-down deep cyclicals, including state-run banks and infrastructure companies,” he said in a report.

The market was seen making a shift from defensives and export-oriented themes to domestic cyclicals. The BSE IT index on Monday shrank five per cent, while the BSE FMCG index dropped four per cent. Meanwhile, the BSE Power and BSE Oil & Gas indices gained 10 per cent and eight per cent, respectively. The banking and realty indices added three per cent and seven per cent, respectively.

“With an economic turnaround and manufacturing revival taking center stage, we recommend investors to intensify focus on domestic cyclicals and policy-improvement plays. Banks remain our biggest ‘overweight’ as the sector is highly levered to government policies and a decisive-mandate-induced political stability,” said a Deutsche Equities report.