Indian economy is showing signs of fatigue given high inflation, the Russia-Ukraine war and rising crude prices.
While Russia Ukraine war will increase inflation, there could be a silver lining for rural India given: (1) ₹500-600 billion additional profits from rabi crop in wheat, mustard, etc., and (2) likely gains of ₹1,000-1,500 billion for the dairy farming sector.
We believe the bottom end of the pyramid has been protected from inflation significantly by PM Garib Kalyan Yojana (free rice/wheat/pulses/edible oil, etc.) will protect the downside.
Normal monsoon and weak fourth Covid wave will increase consumer confidence and boost rural demand.
We believe the structural story is intact led by (1) IT services with strong global demand, record hiring and salary hikes, (2) expected gains from China+1 supply chain realignment, (3) rising visibility of private sector capex, (4) PLI schemes exceeding ₹2,000 billion over coming 3-4 years, and (5) huge government-led Infra capex amounting to $1,400 billion although some delay due to inflation looks likely.
India seems well placed to fight against the XE variant of Omicron given that we have administered at least one vaccination doze to nearly one billion people and two doses to 840 million people, we would keenly watch out for trends over the next couple of months as a weak or no 4th wave will boost sentiment in a current tough environment.
We remain cautious in the near term with full-year returns in the mid-single digits in the base case. We are removing Hindalco and adding Fortis Hospitals in high conviction picks.
Nifty targets
FY22 Nifty earnings estimate have seen a cut of 3.9 percent while FY23 and FY24 have seen a cut of 3.7 percent and 3.9 percent, implying earnings per share (EPS) growth of 27 percent, 17 percent, 14.2 percent for FY22, FY23 and FY24, respectively.
Consensus estimates have seen a cut of 4.7 percent, 2.7 percent and 2.5 percent, respectively. PLE is lower than consensus by 0.2 percent and 1.2 percent for FY23 and FY24 respectively.
Base case: We value Nifty at the last 10-year average PE of 20.8 times on FY24 EPS of ₹888, and arrive at the April 23 Nifty target of 18,470 (18,441 earlier based on 20.6 times December 2023 Nifty EPS of ₹895).
Bull Case: We value Nifty at a 10 percent premium to the 10-year average PE and arrive at the April 2023 target of 20,317 (20,285 earlier).
Bear Case: We value Nifty at a 10 percent discount to the 10-year average and arrive at a target of 16,623.
(The author is Director - Research of Institutional Equities at Prabhudas Lilladher)
Disclaimer: The views and recommendations made above are those of the author and not of MintGenie.
