Nomura sees Nifty at 10,200 in Mar'21; financials to drag earnings

The lockdown's impact on corporate earnings will be worse than seen during the GFC, according to Nomura

The headroom for markets seems to be limited with Nomura expecting the Nifty50 to scale up to 10,200 levels by March 2021 – a modest gain of around 5 per cent from the current levels. While at the global level, equity markets are likely to be supported by strong liquidity, growth stimulus with investors willing to look past near-term earnings declines hoping for a revival in FY22, for India the expectations, according to Nomura, are likely to be relatively muted.

“Equity market valuations are supported by falling yields in India and globally. Given medium-term growth concerns, we think an expansion in the market multiple to 20x from the current 15.9x is unlikely. We assign 16.5x FY22F Nifty earnings per share (EPS) to arrive at our March 2021 Nifty target of 10,200,” wrote Saion Mukherjee, managing director and head of India equity research at Nomura in a June 1 co-authored report with Neelotpal Sahu.

The lockdown triggered by the rampant spread of Covid-19 that brought all economic activity to a standstill will cast a significant impact on corporate earnings, which according to Nomura's estimates, will be worse than seen during the global financial crisis (GFC) in 2008/09. In each of the past nine years, they said, corporate earnings have been below consensus expectations at the start of year. In fact, the extent of the earnings miss has increased over the past four years.

“The COVID-19 pandemic now casts significant uncertainty on near-term earnings. Consensus has cut its Nifty 50 earnings estimates for FY21 by 18 per cent over the past one-and-a-half months. We estimate further downside risk of 17 per cent / 9 per cent to current consensus estimates for NIFTY for FY21/22,” Mukherjee and Sahu wrote.

Corporate earnings

This fall in corporate earnings, according to Nomura, will be led by the financial and oil & gas sectors. Revival in consumer discretionary segment, too, will be delayed and lower than the current estimates. Further, potential rise in commodity prices is also a key risk to earnings, they said.

For key banks in the Nifty that now face a weakening growth outlook, poor credit quality and extended moratorium, Nomura's loan growth assumptions have declined from 13.6 per cent / 13.1 per cent to 8 per cent / 11.4 per cent in FY21F/FY22F.

“Overall, we estimate 30 per cent / 16 per cent downside risk to current consensus estimates for financials for FY21 / 22. We estimate overall -30 per cent / -13 per cent risks to consensus estimates for the oil & gas sector for FY21 / 22,” Nomura said.

With the demand outlook uncertain, Nomura expects corporate capex to also remain muted in the near term. “Even as infrastructure investment remains the focus of the government, stretched government finances are likely to hurt order inflows and execution, which will also be impacted by migration of labor and future unavailability of labor at construction sites,” Nomura said.

As an investment strategy, retained its overweight stance on the healthcare sector and has turned positive on the information technology sector.

"We are positive on pharmaceutical companies that are 'over-invested' and at the cusp of delivering strong earnings growth. Weaker rupee is also supportive. We turn positive on IT services as valuations are reasonable and there are increasing prospects of stronger growth over the medium term. We maintain Reliance Industries (RIL) as one of our top picks in India. Underweight financials, infrastructure / construction / cement," the Nomura report said.