Prabhudas Lilladher raises Nifty target to 21,035, remains ‘overweight’ on auto, banks, IT

Brokerage firm Prabhudas Lilladher has raised Nifty's next 12-month target to 21,035 from 20,936 earlier, implying a 15.8 percent upside from the current levels as it believes India's long-term growth story remains intact notwithstanding near-term volatility.

"We believe the coming decade belongs to India given the benefits of superior growth, favourable government policies and demographic dividend which would provide steady returns from current levels, notwithstanding near-term volatility due to fluid global situation," said the brokerage firm.

In the base case scenario, Prabhudas Lilladher has valued Nifty at a 10-year average price-to-earnings ratio (PE) (20.6 times) with Sept-24 earnings per share (EPS) of ₹1,021 and arrived at a 12-month target of 21,035 (20,936 based on 20.5 times Sept 24 EPS of ₹1,016 earlier).

The brokerage firm is 'overweight' on auto, banks, IT services, capital goods and healthcare. It is 'underweight' on metals, cement, consumer, oil and gas and NBFC.

It has added Axis Bank, Bank of Baroda, PVR, Sumitomo Chemicals, Max Healthcare and Cipla as its high conviction picks and removed INOX, Sun Pharma, ICICI Bank, Crompton Consumer and Westlife from the high conviction picks category.

In a bull case, the brokerage firm valued Nifty at a 10 percent premium to a 10-year average (22.7 times) and arrived at a target of 23,138 (22,918 earlier at a 10 percent premium to long-period averages).

In a bear case, like March 20, we can see Nifty trading at a 20 percent discount to LPA (long-period averages) with a target of 16,828, Prabhudas Lilladher said.

"Nifty EEPS has seen only minor tweaks in the current quarter with 12.4% EPS CAGR over FY22-25 with FY23, FY24 and FY25 EPS of ₹845.7, ₹957.8 and ₹1,084.4, respectively. Our estimates are higher than the consensus by 2.2% in FY23 while they are lower by 3.3% and 4.8% in FY24 and FY25," said Prabhudas Lilladher.

"Q2 results have seen a cut of 1.1% and 0.6% in FY23 and FY24 EPS while FY25 EPS has seen an increase of 1.4%. Contrary to this consensus EPS for FY23/24/25 has seen a cut of 6.6/3.0/2.3% which is much higher than PL EPS cuts," it said.

The brokerage firm highlighted that Nifty is currently trading at 19.8 times one-year forward EPS which is at a 3.9 percent discount to a 10-year average of 20.6 times. 

The brokerage underscored that post-Covid, Nifty has only briefly traded above the 10-year average and has been trending lower than that most of the time.

On the macroeconomic front, Prabhudas Lilladher believes there is a reasonable probability of an uptick in rural demand in the coming quarters.

"There seems reasonable probability of an uptick in rural demand in coming quarters led by: (1)Soil moisture and water reservoir levels indicate good Rabi harvest which should boost farm income and rural sentiment. (2) Lower employment demand under MNREGA indicates a pick-up in infrastructure, construction and other economic activities. Even the rural wage levels are now 20% above the pre-covid levels. (3) Inflation in fuel and food has peaked out which will provide respite in rural India," said the brokerage.

It expects an increase in government expenditure in rural India ahead of the FY24 general election which will boost demand from Q4FY23 and Q1FY24.

Prabhudas also believes India is on the verge of a big CAPEX cycle recovery that will play out in the coming years.

The brokerage firm highlighted that high-frequency indicators like GST collection, peak power demand, air travel recovery, apparel sales, QSR, CV, housing, and CAPEX announcements are positive. Although rural demand remains tepid and signals are mixed as of now, peaked-out inflation and strong pent-up demand from the middle and upper middle class are positives.

Prabhudas Lilladher believes Q3 will benefit from improvement in margins given that cost pressures are abating.

Moreover, the global supply chain seems to be in better shape and the semiconductor shortage appears to be ebbing now.

"We expect QoQ margin recovery from Q3 and YoY from Q4FY23 which will boost profitability. Any revival of rural demand would be icing on the cake," said the brokerage firm.

Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.