Indian equities are only a short distance away from being the most expensive they have ever been, according to Credit Suisse.

“With 12-month forward P/E multiples nearly 20% higher than those on Jan. 31, with a broad-based increase in P/E multiples, the recovery is priced in,” it wrote in its market outlook note for 2021.

India’s benchmark Nifty 50 index is set for its best yearly advance since 2017. It will also be the fifth straight year that the 50-stock gauge has delivered positive returns in a calendar year. This, after the markets reversed from their worst sell-off in over a decade, caused by the Covid-19 pandemic and the resultant lockdowns. “Once the worst period of uncertainty about the Covid-19 pandemic passed, the market began to look at the post-pandemic economy/market,” the note said.

The Nifty is now up 13% this year, after having recovered all its losses in November and also surpassing its previous record high of 12,430, later that month.

While markets are pricing in optimism around a potential vaccine for Covid-19, easy liquidity conditions and a benign interest rate environment contributing to an overall economic recovery, Credit Suisse believes that it will be corporate earnings through which the next leg of upside for the markets should come from.

“Upside thus must come from earnings,” it wrote in the note. “12 months from now, the market would be looking at CY22/FY23 earnings. Even if Nifty and FY22 and FY23 EPS forecasts don’t change, the P/E will have still not reverted to pre-Covid levels.”

India Inc.’s performance in the quarter ended September wasn’t as bad as anticipated as companies continued to cut costs amid benign input prices and a significant drop in advertising and promotions. Operating profits of companies, excluding banking and finance rose sequentially and year-on-year. The average Ebitda margin of the universe (Ex-BFSI) stood at 20.2% in the July-September period, BloombergQuint had reported earlier this month citing Bloomberg data.

“To comfortably expect upside to the Nifty, FY23 earnings estimates need to rise. The challenge is that from the time they first appear, index EPS estimates generally fall by 10% or more,” the note said.

Credit Suisse expects 50-60% of the year-on-year EPS growth expected in FY22 to come from private banks, consumer discretionary and energy sectors.

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