Our base case projection for Nifty is 17,500 in 12-18 mths: Dhananjay Sinha

We do not think moderation in earnings will have any significant impact on the market. Hence, we see around 15 per cent upside on Nifty

As the market is expecting a much better economic scenario in the post-Covid world, Dhananjay Sinha, MD & Chief Strategist at JM Financial Institutional Securities tells Nikita Vashisht that fiscal 2021-22 (FY22) and FY23 earnings may grow at an average rate of 27 per cent. Edited excerpts:

Market seems to be pricing-in a sharper rebound in economic activity relative to last year. What is your view on this?

The market is definitely pricing in a strong earnings growth in fiscal 2021-22 (FY22) and FY23 after a much stronger-than-expected performance in FY21. Despite the Covid pandemic and lockdown shocks in FY21, Nifty companies appeared to have delivered a positive 11 per cent growth. In FY22 and FY23, the average earnings growth is expected at 27 per cent. Hence, from the market view point, the buoyancy is supported by expected earnings growth trajectory, which is much higher than the actual average of 3.5-5 per cent over the past 6-7 years. Clearly, the market is expecting a much better economic scenario in the post COVID situation.

How comfortable are you with the valuations at this stage?

Our analysis of global valuations shows that India has been expensive due its outperformance over the past year. With price to earnings (PE) at 18x and PBx at 2.7 CY22E, the Nifty is above the averages for 27 global indices at 14.8x and 1.8, respectively. South Korea, China, Israel, Russia, and Eastern Europe are on the cheaper side while most AEs are on the expensive side (US, Japan, UK, Canada, Europe, Spain, Taiwan). However, India has remained expensive even on a 5-year average basis.

Given that earnings growth for Nifty has been fairly modest (3.5 per cent and 5 per cent averages for the past 5 and 13 years), Indian equities have benefited from a liquid market, stable domestic financial conditions (systemic as well as rates and currencies), easy global liquidity and continued expectation of higher earnings growth.

What all negative surprises are the markets already pricing in?

While there is a high probability of earnings downgrades even for FY22E (34 per cent growth) and FY23 (21 per cent), there will be little impact on markets on aggregate levels. Stronger companies will continue to be valued higher, supported by global inflation, especially in the US and led by disproportionate rise in commodity prices.

That said, expected growth slowdown beginning mid-2021 should bring down the abnormal cost and inflationary pressures, thus, ensuring sustenance of easy monetary policy by global central banks, especially the US Fed and ECB. Under our assumptions, global financial condition is likely to remain fairly comfortable, thereby supporting Indian equities, despite some earnings downgrades.  

Overweight / underweight sectors?

Our overweights (OWs) are Banks, Cement, Automobiles, IT and select names in Industrials, Real Estate, & Electrical Consumer Goods (ECG). Our Underweights (UW) are Metals, Consumer staples, Pharmaceuticals, Oil & Gas and Utilities.

China has voiced concerns over commodity prices. Will a meaningful follow up action open buying opportunities in sectors like automobile and auto-ancillary back home?

Our study indicates that for the OECD countries as a whole, the recovery in consumer confidence is fairly modest and in developed countries like the US the pricing power in the manufacturing sector is close to the lowest level in 50 years. Higher inflation is expected to slow the recovery in advanced economies and rising in cost of construction can impact projects in China, where companies have started to see cash flow problems and delaying projects, all of which can lead to rising unemployment and slowing economy.

Here, the exponential rise in metals prices, especially steel indicate speculative and hoarding activities. The combination of government actions in China and slowed demand should lead to meaningful correction in global metal prices, specially steel. Thus while we are cautious on metals including steel, it will aid consuming sectors like autos and auto ancillaries.

FY22 corporate earnings estimates?

We have seen some moderating in earnings projections for FY22 across some sectors and marginal tinkering in FY23 estimates. The average 27 per cent earnings growth is on the higher side. We expect the aggregate earnings for Nifty companies to be scaled down by approximately 8-9 per cent for both years. But even then the average growth at 18-19 per cent should be fairly descent. We do not think such moderating in earnings will have any significant impact on the market. Hence, we see around 15 per cent upside on Nifty over the next 12-18 months. Our base case projection is at 17,500.

How much should investors allocate to gold given inflation and growth concerns? How seriously should one look at cryptocurrencies?

We will not recommend cryptos. If our view of a meaningful correction in global commodities is true, then the need to acquire gold as a hedge against higher inflation can diminish in the coming months.