India Market No Longer Cheap; Earnings Key Upside Driver, Says Credit Suisse
Indian equities are only a short distance away from being the most expensive they have ever been, according to Credit Suisse.
“With 12-month forward P/E multiples nearly 20% higher than those on Jan. 31, with a broad-based increase in P/E multiples, the recovery is priced in,” it wrote in its market outlook note for 2021.
India’s benchmark Nifty 50 index is set for its best yearly advance since 2017. It will also be the fifth straight year that the 50-stock gauge has delivered positive returns in a calendar year. This, after the markets reversed from their worst sell-off in over a decade, caused by the Covid-19 pandemic and the resultant lockdowns. “Once the worst period of uncertainty about the Covid-19 pandemic passed, the market began to look at the post-pandemic economy/market,” the note said.
The Nifty is now up 13% this year, after having recovered all its losses in November and also surpassing its previous record high of 12,430, later that month.
What Will Drive Upside?
While markets are pricing in optimism around a potential vaccine for Covid-19, easy liquidity conditions and a benign interest rate environment contributing to an overall economic recovery, Credit Suisse believes that it will be corporate earnings through which the next leg of upside for the markets should come from.
“Upside thus must come from earnings,” it wrote in the note. “12 months from now, the market would be looking at CY22/FY23 earnings. Even if Nifty and FY22 and FY23 EPS forecasts don’t change, the P/E will have still not reverted to pre-Covid levels.”
India Inc.’s performance in the quarter ended September wasn’t as bad as anticipated as companies continued to cut costs amid benign input prices and a significant drop in advertising and promotions. Operating profits of companies, excluding banking and finance rose sequentially and year-on-year. The average Ebitda margin of the universe (Ex-BFSI) stood at 20.2% in the July-September period, BloombergQuint had reported earlier this month citing Bloomberg data.
“To comfortably expect upside to the Nifty, FY23 earnings estimates need to rise. The challenge is that from the time they first appear, index EPS estimates generally fall by 10% or more,” the note said.
Credit Suisse expects 50-60% of the year-on-year EPS growth expected in FY22 to come from private banks, consumer discretionary and energy sectors.
Model Portfolio Changes
- Credit Suisse expects the sentiment for industrials to improve, boosted by the investment potential through performance-linked incentive schemes.
- “PLI schemes indicate a significant departure from the norm as direct incentives are only on incremental production and only selected champions are selected to maximise impact,” the brokerage said. It expects PLI schemes to add 1.7% to India’s FY27 GDP. “We estimate that the schemes can generate $150 billion in incremental sales by FY27.”
- It has turned overweight on industrials, citing that the sector’s price-to-book, relative to the market is at a multi-year low.
- The firm is also overweight on banks—both private banks and State Bank of India—along with metal stocks. It’s underweight on discretionary (both four and two-wheelers), NBFCs, healthcare and cement.
- Positive growth surprises can continue for another four to six months.
- Medium-term growth outlook now improving after several years of downgrades.
- A pro-cyclical policy means a growth boost in the second half of FY21.
- Global production and trade yet to recover completely.
- Balance of payments surplus forcing easing of monetary conditions.