The Bombay Stock Exchange (BSE) logo is displayed in front of a bronze bull statue at the Bombay Stock Exchange. (Photographer: Dhiraj Singh/Bloomberg)

Goldman Sachs Downgrades India On High Valuations, Polls

Goldman Sachs Group Inc. downgraded Indian equities for the first time in more than four years citing elevated valuations and upcoming elections.

The financial services company has been bullish on Indian stocks since March 2014 on expectations of pro-growth government policies and structural reforms that can lead to a recovery in corporate profits. The market has more than doubled since then and outperformed the regional peers by 60 percentage points in dollar terms.

“The risk reward for Indian equities is less favorable at current levels,” said Sunil Koul, analyst at Goldman Sachs. “We lower our investment view from ‘Overweight’ to ‘Marketweight’.”

The company rolled over its 12-month Nifty target to 12,000 from 11,900. “We expect markets to consolidate heading into the elections and the Nifty to reach our 12-month target of 12,000 as political uncertainty wanes and earnings accrue,” Koul said.

Goldman Sachs highlighted five reasons for the India downgrade:

  1. Stretched valuations as Indian equities are most expensive in Asia.
  2. Macro headwinds on account of crude and tighter financial conditions.
  3. Earnings ‘catch up’ priced in at current levels.
  4. Domestic institutional investment flows slowed for four consecutive months.
  5. Event risks in form of elections and increase in fiscal deficit.

Goldman Sachs’ expectations are in contrast with that of Morgan Stanley, which remains upbeat. The broking firm in a note said Indian equities continue to be on an uptrend backed by broad-based earnings growth acceleration.

Morgan Stanley cited three reasons for its optimism:

  1. Its proprietary capex survey indicates that corporates are confident on business growth over the next 12 months; “We are seeing signs of the investment rate rising and thereby profit margins should also mean revert,” it said.
  2. Its banks team thinks bad loan formation for the banking system has peaked and slippages will drop over the next two quarters.
  3. The recently concluded earnings season points to a broad-based acceleration in revenue and earnings growth for broad as well as narrow market companies.

The broking firm raised their Sensex target to 42,000 for September 2019 from 36,000.

On its part, Goldman Sachs upgraded defensives and exporters, and is now overweight on private banks, technology and metals.

The investment bank upgraded the infotech sector to ‘Overweight’ despite its strong performance from start of the year. The sector, it said, can continue to outperform given robust deal win momentum, scaling up of digital projects, ongoing margin tailwinds from a weaker rupee and the defensive nature of the sector.

Goldman Sachs also raised its stance on pharma from ‘Underweight’ to ‘Marketweight’ on moderating price erosion in the U.S., steady first quarter earnings and forex tailwinds from depreciating rupee.

On the downside, the firm cut industrials to ‘Marketweight’ due to issues surrounding large dollar-denominated debt. It also lowered its stance on automobile to ‘Marketweight’ given headwinds from rising commodity prices and competition.

Goldman Sachs advises investors to:

  • Hedge long stock positions in India.
  • Look at rural recovery and affordable housing stocks like Colgate Palmolive India Ltd., Emami, Britannia and Mahindra & Mahindra.
  • Watch out for stocks with stable sales or earnings growth profiles like HDFC Bank, TVS Motor, Eicher Motors and Larsen & Toubro.
  • Consider exporters and export-driven automakers that stand to benefit from the rupee’s depreciation.