Nomura Overweight On IT, Healthcare, Infra; Says Corporate Earnings Set For Strong Growth
Nomura remained upbeat on the technology sector even as it moved some portfolio weight from IT to infrastructure and consumer, citing a recent outperformance of IT services.
“The outperformance of Nifty since the peak of Covid-19 cases (May 8, 2021) is driven by defensive sectors IT and consumer and select NBFC (non-bank financial companies),” the research firm said in a note co-authored by analysts Saion Mukherjee and Neelotpal Sahu. “We continue to prefer a bottom-up approach. We retain our sector preferences with overweight on IT, healthcare, infra/logistics and select financials. We remain underweight on autos, consumer and cement.”
That comes as Nomura’s concerns on relative underperformance of India’s economic growth due to Covid-19 cases and delay in vaccinations, surge in inflation and signs of withdrawal of monetary policy support globally weakened over the past few months. “This along with steady earnings estimates provided support to the market valuations.”
Also, a regulatory crackdown in the technology and tuition sectors has meant greater financial market risks emanating from China, Nomura said. “Slower growth as well as volatility in financial markets in China benefit Indian equities.”
Q1: Hits And Misses
According to Nomura, corporate earnings in the first quarter of the ongoing fiscal were only marginally lower than street expectations.
“Net earnings for 140 companies that we track recorded a 20% CAGR over Q1 FY20, and were 2% lower than consensus estimates,” it said in the report.
Earnings, according to the research firm, were ahead of consensus estimates for cement, consumer durables, healthcare, metals and telecom, while consumer staples, infrastructure, utilities and financials missed.
Overall aggregate Ebitda margin at 19.1% was also ahead of the consensus estimate of 18.4%, helped by metals, and oil and gas stocks, Nomura said.
For the domestic economy-linked sectors such as autos (excluding Tata Motors Ltd.), consumer, durables, cement, industrials, and logistics, demand was adversely impacted in the quarter ended June because of the pandemic. But Nomura now expects a growth revival in this segment.
Banks, it said, missed estimates on all fronts — loan growth, operating profit growth and credit cost. “We think risks to loan growth and credit cost assumption remain.”
Still, Nomura expects that corporate earnings are set for stronger growth versus the 8.7% earnings growth recorded over FY18-21.
“Current consensus estimates project Nifty earnings rise at a 26% CAGR over FY21-23F, with banks, metals, Reliance Industries Ltd. and IT services being the key contributors,” the report said. “Consensus is factoring 24% earnings increase in Q2-Q4 FY22 over Q1 FY22. This recovery is largely dependent on financials and domestic focus companies.”
According to the research firm, a combination of cyclical recovery, steps by businesses to improve profitability and market share gains by larger listed players support earnings.
After the June-quarter results, Nomura, in its model portfolio, has replaced Max Financial Services Ltd. with SBI Life Insurance Co.
SBI Life, according to Nomura, has scope to further improve its margin since the company has lower number of non-participating insurance policies wherein the insurer’s profits are not shared with policyholders. Other insurance companies, it said, are already at optimal non-participating plan mix.
The research firm has also excluded Sun TV Ltd. from its portfolio, and listed Sun Pharmaceutical Industries Ltd., Larsen & Toubro Ltd., Container Corp of India Ltd., HCL Technologies Ltd. and ICICI Bank Ltd. as its top picks.