A sharp spike in Covid cases over the past few weeks, movement curbs imposed to in select cities to ‘break the chain’, elevated commodity prices that may stoke inflation coupled with the rich valuation of Indian markets has led Nomura to cut its Nifty50 target to 15,340 for March 2022 (earlier target: 14,680 by December 2021) – a modest rise of 2.7 per cent from the current levels.
Post the rally from mid October 2020, Nomura said, the market has re-rated and now trades at 21x one-year forward earnings, with valuations higher than the historical average.
“The expectation of favorable liquidity conditions (lower cost of capital) and an improvement in the corporate earnings cycle has driven the performance. A potential rise in yields could put pressure on valuation multiples unless expectation of corporate earnings growth surprises materially on the upside. Assigning 18.1x to the current FY23 consensus estimate, we arrive at a March 2022 Nifty target of 15,340,” wrote Saion Mukherjee, India equity strategist at Nomura in a note dated April 7, co-authored with Neelotpal Sahu.
Markets, Nomura believes, are dealing with three headwinds – the resurgence of Covid-19 cases; inflationary pressure with the rise in commodity prices; and rich valuations. Though the research and broking house has ruled out the possibility of a nation-wide lockdown for now, local restrictions, it said, could have a shorter and even potentially medium-term impact on growth.
It counts the policy on investment and manufacturing-led growth and the resilience of corporate earnings in the recent past driven by lower costs and market share gains from unorganised sector / smaller players as the two positives for the markets.