Best yet to come for Sensex and Nifty: Foreign brokerages

MUMBAI: Investment banks Goldman Sachs Group Inc. and Citigroup Inc. have raised their targets for India’s key benchmark indices as they bet economic growth will recover in the second half of the current fiscal boosting earnings growth.

They cited the bank recapitalisation programme, infrastructure push and continued inflow of domestic savings into equities as factors that will help investors overcome concerns on valuation and propel the Sensex and Nifty to new highs in 2018. Their revised assessments comes when foreign institutional investors have been lukewarm towards Indian stocks in recent times.

In a 29 October note, Citigroup said it expects the Sensex to reach 33,800 in March 2018 from an earlier target of 32,200; it also reduced its fiscal 2018 earnings per share growth for Sensex firms to 13% from 17-18% at the start of the year.

“While earnings disappointments/downgrades continue, the Street should be more optimistic on recovery post the big government push” in the form of bank recapitalisation, infrastructure blueprint, and increases in minimum support prices, wrote Citigroup analysts.

Last week, the government announced that it would infuse ₹2.11 lakh crore capital into stateowned banks over this year and next through various means. It also announced ₹6.92 lakh crore in investments in roads over the next five years and raised the minimum support price for wheat. These measures are expected to boost bank credit growth which is hovering at single digit levels and boost economic output. Markets have been rising since then and on Tuesday, both the Sensex and Nifty closed at new highs. The Sensex rose 0.33% to 33,266.16 points; the Nifty gained 0.39% to 10,363.65.

Goldman Sachs has also increased its end 2018 Nifty target to 11,600 points, up from a September 2018 target of 10,900 points and reiterated its overweight stance on India, citing the impact from bank recapitalisation.

Goldman analysts are more optimistic about a corporate earnings recovery which they have forecast to happen as early as the second half of the current fiscal as the adverse impact of the transition to the goods and services tax (GST) wanes. “Re-rating of GDP growth expectations and removal of ‘left-tail’ risk in the banking sector should support India’s price-to-equity premium relative to the rest of the region,” they wrote in a October 26 note. Goldman added that history during past recap episodes suggests markets perform strongly as credit growth picks up and macro recovery gathers pace.

High valuations amid weak earnings growth have resulted in foreign investors selling Indian stocks for a couple of months now. In October, foreign institutional investors (FII) sold Indian equities worth ₹5,271.92 crore while local insurance and mutual fund companies bought ₹9,354.31 crore worth of shares.

According to Citi, in the absence of attractive alternatives, domestic flows could be sustained, and the government’s reform agenda and GDP growth recovery should also turn FII sentiment incrementally positive.