Happy days have returned again at the stock market. Fears of last week’s rising bond yields stoking inflation have subsided and the benchmark indices have once again begun their journey towards the new peak. The Nifty-50 index and the Sensex of the BSE shot up by over 2 per cent to close the day at 15,246 and 51,445 on Wednesday. This has once again raised the hopes of a sustained bull run on the Indian markets to continue in the next financial year 2021-22 (FY22), with Nifty settling in the range of 16,075-19,317 at the end of FY22.
The optimism in the market is based on stellar corporate performance for the third-quarter ending December 2020. This is the second consecutive quarter that India Inc has delivered robust numbers.
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Nifty has been one of the best performing global indexes in the past three months and the current rally has become much more broad-based post-budget and announcement of the PSU divestment program.
However, Covid-19 upsurge in a few states is posing a risk given the veracity of the second wave in the US and Europe, Indian economy is back on a growth path.
YES Bank’s report ‘Q3 FY21 Earnings: India Inc. performance on the mend’, observed that going forward, with improving domestic economic backdrop, growth enabling 2022 Union Budget, favourable statistical base and Covid vaccine distribution is picking up, “We expect GDP growth to come in at 11.0 per cent in FY22. However, the risk to growth trajectory cannot be overlooked amidst the recent rise in covid infections in few states leading to region wise lockdowns,” the report said.
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As per the report prepared by Prabhudas Lilladher (PL), the third quarter of 2021 had broad-based earnings where aggregate sales were higher than estimates by 3.9 per cent, EBIDTA by 4.3 per cent and PBT by 6 per cent. Reported sales during the third quarter increased by 0.6 per cent, EBIDTA increased by 16.1 per cent and PBT by 37.8 per cent on a year-on-year basis.
Consumer durables, metals, and cement had the fastest top-line growth. Metals followed by consumer durables and cement had the highest EBIDTA growth at 123 per cent and 50 per cent. Metals, cement, auto, and consumer durables had highest PBT growth.
Festival season demand has been robust, although January (2021) has been relatively soft. The fourth quarter of 2022 should report good numbers on a low base, although margins have peaked out due to rising commodity prices and bottomed outspends on advertising, marketing, and overheads, the PL report said.
During this period, Nifty Earnings Per Share (EPS) has seen an increase of 0.5 per cent for FY21, while FY22 and FY23 EPS has seen upgrades of 0.3 per cent and 1.1 per cent respectively. Nifty EPS is estimated at Rs 491.5, Rs 652.2, and Rs 765.5 for FY21, FY22, and FY23 respectively. Based on this, the estimate is a NIFTY EPS growth of 11.7 per cent in FY21, 32.7 per cent in FY22, and 17.4 per cent for FY23. Their estimates are higher than consensus by 2.7 per cent for FY21, 1.4 per cent and 1.2 per cent for FY22 and FY23 respectively. Nifty is currently trading at 21.8 times its 1-year forward EPS which shows 9.8 per cent premium to 10-year average of 19.9.
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Based on the above-expected earnings level, as the base case, PL said, “We value Nifty FY23 EPS of Rs 765.5 at 5 per cent premium to 10-year average PE of 19.9 and arrive at March 22 target of 16075 for Nifty. Under the bull case scenario, although Nifty has traded at 27x recently, we continue to take an earlier peak of 25x and arrive at a bull case target of 19,137, as against our earlier target of 18,921 earlier”.
“Economic revival, sustained global liquidity, low-interest-rate regime and control of Covid19 pandemic are key to bull case scenario”, it said.
It is premature to predict whether it will be a V or a small W-shaped recovery, as the worst seems to be over for the economy. The rally which was started by IT and pharma has now seen active participation of infra, PSUs, and commodities. “We believe low hanging fruits have been harvested and it’s time to focus on fundamentally strong companies with USP like Scale, brands, marketing, technology, and strong balance sheets. We are witnessing sectoral rotation and expect defensives to take back seat for some time, although long-term drivers remain intact. auto, capital goods, infra, cement, and metals have entered a cyclic uptick and should outperform in the medium term,” the report said.
