Too demanding stock market valuation; disposal target may not be reached: Nomura


The assessment of the Indian stock market at 22.5 times earnings for fiscal year 2021-22 (FY22) is too demanding, analysts at Nomura said on Monday in their appeal on economic outlook, currencies and equities in Asia 2021. Within the region, they expect North Asian markets, particularly China and Japan, to do well for the remainder of calendar year 2021 (S2-CY21). The disinvestment target of Rs 1.75 trillion for fiscal year 22, according to them, may not be achieved.

“Global investors are emotional and not rational. Traditional valuation metrics such as the price-to-earnings (PE) ratio suggest that Indian stocks are trading at 22.5x FY22 earnings, relative to Japan (16.5x) and China (15x ), ”Said Jim McCafferty, co-head of APAC. Research stocks while calling prospects.

Among stocks, they prefer Hindustan Unilever Limited (HUL), given the company’s ability to pass rising input costs on to consumers. “Having said that, even HUL is trading at a high valuation,” McCafferty warned.

According to Nomura, a key driver for Indian markets remains corporate earnings growth despite inflation risks.

The Indian market, according to their recent report, takes into account a 26% compound profit growth (CAGR) of profits between fiscal years 2020-2021 and 2022-23 (FY21-23) with banks, autos, metals, with oil and gas, and information technology (IT) services being the main contributors to the incremental profits during the period. On the other hand, the consumer, telecom, and finance industries face potential risks to current estimates that can lead to a 5-10% drop in overall fiscal year 23 profit estimates, a. he declared.

“Even considering a 10 percent reduction, that would imply a 19 percent CAGR in fiscal year 21-23, higher than the low double-digit single-digit growth recorded in the past,” Nomura said. .

Besides Nomura, other research and brokerage firms, such as HSBC, Jefferies and Motilal Oswal Securities, have also warned of the strong valuation of Indian stocks.

“Indian stocks are trading at 21 times year 22E earnings. The United States is the only market that trades at a premium, while other key markets continue to trade at a discount to India. In terms of P / E, MSCI India trades at a premium of 88% over MSCI EM, above its historical average of 57%, ”wrote Gautam Duggad, Head of Research at Motilal Oswal Institutional Equities .

(Image source: MOSL report)

For fiscal 22, Nomura expects gross domestic product (GDP) growth to reach 10.4%, slightly lower than the 10.8% previously projected. Inflation is also a risk. Consumer price inflation (CPI) for the current year, they estimate, is expected to remain high at around 6 percent, which is also close to the upper band of the RBI’s inflation projection.

“Global growth will have a knock-on effect on India, although the pace of vaccination will remain a key controllable element. By the end of 2021, we expect 50% of the total Indian population (70% of the population aged 18 and over) to get vaccinated. The Reserve Bank of India (RBI) will need to be patient with policy standardization and we expect government divestment proceeds to fall below target in FY22, ”Sonal said. Varma, Nomura’s chief economist for India and Asia excluding Japan.

The 2021-2022 budget had set a divestment target of Rs 1.75 billion. Of the Rs 1.75 trillion, Rs 1 trillion will come from the sale of the government’s stake in public sector banks and financial institutions. Rs 75,000 crore would come in the form of CPSE divestment revenue.

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