‘Base case Nifty projection is 17,500 in 12-18 months’

DHANANJAY SINHA, managing director and chief strategist at JM Financial Institutional Securities, tells Nikita Vashisht in an interview that financial year 2021-22 (FY22) and FY23 earnings may grow at an average rate of 27 per cent. Edited excerpts:

The market seems to be pricing in a sharper rebound in economic activity relative to last year. What is your view on this?

The market is definitely pricing in strong earnings growth in FY22 and FY23 after a much stronger-than-expected performance in FY21. Despite the Covid-19 pandemic and lockdown shocks in FY21, Nifty companies appeared to have delivered 11 per cent growth.

In FY22 and FY23, the average earnings growth is projected at 27 per cent. Hence, from the market view point, the buoyancy is supported by expected earnings growth trajectory, which is much higher than the actual average of 3.5-5 per cent over the past 6-7 years. Clearly, the market is expecting a much better economic scenario post Covid.

How comfortable are you with the valuations at this stage?

Our analysis of global valuations shows that India has been expensive due its outperformance over the past year. With price to earnings (PE) at 18x and PBX at 2.7 CY22E, the Nifty is above the average of 27 global indices at 14.8x and 1.8, respectively. South Korea, China, Israel, Russia, and Eastern Europe are on the cheaper side, while most AES are on the expensive side (US, Japan, UK, Canada, Europe, Spain and Taiwan). However, India has remained expensive even on a 5-year average basis.

What negative surprises are the markets pricing in?

While there is a high probability of earnings downgrades even for FY22E (34 per cent growth) and FY23 (21 per cent), there will be little impact on markets on aggregate levels. Stronger companies will continue to be valued higher, supported by global inflation, especially in the US, and led by disproportionate rise in commodity prices, which is transient.

That said, expected growth slowdown beginning mid-2021 should bring down the abnormal cost and inflationary pressures, thus, ensuring sustenance of easy monetary policy by global central banks, especially the US Fed and ECB. Under our assumptions, global financial condition is likely to remain fairly comfortable, thereby supporting Indian equities, despite some earnings downgrades.

Sectors you are overweight/underweight on…

We’re overweight on banks, cement, automobiles, IT, and select names in industrials, real estate, and electrical consumer goods. And underweight on metals, consumer staples, pharmaceuticals, oil & gas, and utilities.

Your FY22 corporate earnings estimates…

We have seen some moderation in earnings projections for FY22 in some sectors and marginal tinkering in FY23 estimates. The average 27 per cent earnings growth projection is on the higher side. We expect aggregate earnings to be scaled down by about 8-9 per cent for both years. Even then, the average growth at 18-19 per cent should be fairly decent. We do not think such moderating in earnings will have any significant impact on the market. Hence, we see around 15 per cent upside on Nifty over the next 12-18 months. Our base case projection is at 17,500.