23 December 2019
Citi analysts believe that the cascade of policy rate reductions and asset purchases by Central Banks around the world has been a key driver of bullishness in the global markets. Within Asia, they remain overweight on India, but expect limited upsides given weak macros and earnings trends, while valuations remain expensive. Citi analysts however, expect returns concentration to continue in an environment of risk-aversion and weak fundamentals, supported by mutual fund and foreign flows.
Citi analysts introduce their Nifty target for December 2020 at 12,700 (implying ~5% upside from current levels) based on a 16x 1-year forward P/E multiple, down from 17x earlier – reflecting some deterioration of macros over the last quarter and low earnings visibility.
Citi analysts expect Nifty earnings to grow ~32% in FY21, recovering from effects of one-offs and price wars in the telecom sector and an expected normalization of credit losses in the financial sector. Adoption of lower corporate tax rate may help earnings growth as well. They however believe that the trend of earnings downgrades may continue through the next fiscal.
Robust domestic flows have supported valuations even though earnings growth has been weak. Current Nifty valuation of over 18x 1-year forward P/E, trending ~1.5sd above the 5-year mean, is believed to be on the expensive side, as per Citi analysts. Comparing against other Emerging Markets, MSCI India is currently trading at ~50% premium to MSCI EM (vs a long-term average of 40%).
As highlighted in our earlier note, the mid-cap index has underperformed benchmark Sensex by >30% over the last 2 years. Even within large-caps, returns have been concentrated. With the valuation discount of mid-caps vs large caps close to its 10-year high, Citi analysts perceive an improved risk-reward scenario in selective mid-caps.
Successful divestment of government controlled entities may have a positive impact on the valuations of other PSUs lined up for divestiture, in addition to freeing up fiscal space to aid rural/agriculture and infrastructure sectors. Citi analysts however expect India’s growth recovery to be slow and protracted, led by lagged effects of fiscal and monetary stimuli and gradual improvement in Bank/NBFC balance sheets.