Consensus price targets hint at modest stock market upside this year

Analysts expect Nifty50 components to gain average 6.6%

The benchmark National Stock Exchange Nifty50 notched up its eighth record closing high for this calendar year on Monday. While the underlying momentum seems bullish, the blue-chip index may provide only a modest upside this year, according to the consensus price targets of its individual index components.

Comparing the current stock prices that make up the index and their price targets (compiled by Bloomberg) indicates an average 6.6 per cent upside for the Nifty50. Meanwhile, the red-hot Nifty Smallcap 100 and the Nifty Midcap 100 have the potential to go up by 8.6 per cent and 2.2 per cent, respectively.

The limitation of this analysis, however, is that not all stocks have analysts’ coverage, and analysts tend to revise price targets based on changes in the micro and macro factors.

“Generally, the earnings improvement for many stocks has been faster than the consensus target prices. Analysts have been wary of raising price targets aggressively even as stock prices kept rising due to fund flows. Analysts have the fear of a slowdown in earnings growth at the back of their minds due to global factors, continued rural slowdown, and high base effect, even as the uncertainty of the outcome of general elections stares at them,” said Deepak Jasani, head of retail research, HDFC Securities.

Also, as not all components have an equal weighting in the index, a modest upside in an index heavyweight can skew performance.

For instance, the consensus price target for top-weight HDFC Bank is currently at Rs 1,928, about 35 per cent above the last close of Rs 1,433. If the shares of the private sector lender move towards their “fair value” ascribed by the Street, it could bolt the Nifty index given its high influence on the index.

Bajaj Finance, Adani Enterprises, and ITC are some of the other stocks where price targets are significantly above the current prices.

However, the influence of a signal stock on the more broad-based Nifty 500, midcap and smallcap indices tends to be low. As a result, in this case, price targets could be a better yardstick to gauge their performance, say market observers.

About a third of the components in the Nifty50, Nifty 500, and Nifty Smallcap 100 indices are currently trading above their price targets, while over 40 per cent hover above their price targets in the Nifty Midcap 100 Index.

Trivesh D, chief operating officer at Tradejini, said historically markets have delivered positive returns in the run-up to the elections. However, one has to be careful this time around given the sharp run-up over the past year, he added.

The Nifty50 has rallied 27 per cent in the past year. Meanwhile, the Nifty Midcap 100 and the Nifty Smallcap 100 indices have surged by 60 per cent and 72 per cent, respectively.

Trivesh believes that the potential for further rerating is limited as the earnings may only partially support current market valuations.

“Corporate India has given moderately decent results. However, the earnings may not fully lead to rerating as the market has outperformed all earlier ratings and expectations,” he said.

Given the expectation of modest upside, how does one approach the markets?

“Investors will have to maintain their overall asset allocation and take profits from some stocks that have run up too fast in a short time and trade ahead of their fundamentals. For fresh buying, they should now be guided more by the possibility of earnings improvement rather than valuation expansion,” advised Jasani.