Global brokerage house BofA Securities has lowered its Nifty target from 18,500 to 17,500 citing weakening macro, higher crude, rupee depreciation, global slowdown and China revival.
“In the near term, higher crude, slowing global growth along with depreciating currency could create a downward spiral of macro risks - ballooning current account deficit and overshooting fiscal deficit," said the brokerage.
It sees 40 basis points upside risk to FY23's budgeted fiscal deficit estimate of 6.4 percent. It also sees the current account deficit (CAD) at 3 percent of GDP vs 2.5 percent threshold driven by an uncomfortably high trade deficit – 16 percent export and 46 percent import growth YoY (Apr-Aug).
"Thus, if crude and currency risks play out, they could deteriorate India macro and we see risks to capex upcycle thesis,” said the report. On the basis of the above-mentioned factors, BofA further noted that more earning cuts cannot be ruled out.
Thus, it cut Nifty trading range to 16,500 – 18,500 (from 17K - 19.5K earlier) and lower its base target to 17,500 (from 18,500 earlier).
In August, BofA had revised its Nifty target upwards twice citing a reduction in macro uncertainty. First from 14,500 to 15,600 and then to 18,500.
Global macro factors
As per the brokerage, a spike in crude with further Opec+ production cuts and potential China revival could be key risks to the earnings.
Higher crude impacts the Indian economy in 3 major ways:
1) Inflation: 10 percent rise in crude oil price impacts CPI inflation by 23bp, it could be larger, 100 bps over 12-18 months, due to cost reset via higher transport costs, noted the broekrage. BofA Global Research Economists expect CPI to average at 6.8 percent YoY in FY23.
2) CAD: $10/bbl rise in crude pushes India's CAD up by 27 bps. The brokerage sees upside risks to its FY23 CAD estimate of 3 percent, with oil assumed at 105$/bbl. The risk of funding this elevated CAD is now rising, given thinning FX reserves, it added.
3) Higher crude could result in higher than budgeted fuel subsidy or foregone excise revenues if the government chooses to give relief to the consumers, stated BofA.
Currency risks
The brokerage noted that the Indian currency rupee is already down 5.7 percent CYTD, and the brokerage expects it to hit ₹83 by March 2023 (-1.2 percent). From its peak of $640 billion in October 2021, RBI's forex reserves have fallen to $534 billion, which implies an import cover of marginally above 8 months, it pointed out.
Of the $110 billion fall in the reserves, 67 percent was on devaluation of non-USD reserves and bond yields move, mostly in the last 5 months, added the brokerage. As the FX reserve buffer is thinning, a sizable balance of payments (BoP) deficit is likely to exert pressure on the rupee, it predicted. Global slowdown threatening export growth is a key risk to an already elevated trade deficit, added the brokerage.
Strategy
Amidst this backdrop, the brokerage continues to favor domestic cyclical (Financials/Industrials) and defensives (Utilities /Healthcare) and upgrade Staples as a hedge towards volatile markets.
It remains underweight on external facing IT/Materials/Energy but upgraded Cement to overweight on strong traction in real estate & continued execution momentum in Industrials.
However, it downgraded autos to underweight on crude, currency headwinds and normalizing demand (wait periods now <1 month vs 3-6 months earlier) and Communication services on higher 5G capex, limited visibility on tariff hikes. It also remains underweight on Consumer Discretionary given steep valuations.
September quarter preview
The brokerage estimates a 12/14 percent increase in Nifty/Sensex led by financials and energy. Meanwhile, it sees a growth of 8/11 percent in Nifty/Sensex YoY ex-financials.
The full effect of commodity price corrections on margin is unlikely in Q2 due to high-cost inventory, it noted. EBITDA margin for Sensex companies is expected to contract 200 bps YoY but expand 400 bps QoQ on softer commodity costs, predicted the brokerage. Overall, Bofa's PAT estimates remain conservative versus street for FY23/FY24 (-4 percent/-2 percent below consensus).
