Remember the third-quarter earnings season last year about this time when earnings were not really great. The corporate earnings picture has changed dramatically since then.
With the equity markets getting a big push from the Union Budget 2021, and the third-quarter earnings better than expected, brokerages are now raising the bar for the Nifty and the Sensex in 2021.
Some of the optimism springs from the fact that the Union Budget is likely to support cyclical sectors. Cost saving has been another driver this year. Brokerages such as Kotak Securities are expecting an earnings uptick of more than 6% this year on the back of the savings.
The brokerage house has raised the target for the Sensex by 10 percent to 51,000. While that is not far away from the current levels, it shows that equity markets are where the action is.
Consider what analysts at Kotak Securities are saying. “Our CY21-end Nifty 50 earnings per share estimates work out to Rs 770. Assigning a higher multiple of 19.5 times gives us a target of 15,000 for the end of CY21.”
Analysts at Morgan Stanley India, too, upgraded Sensex’s target by about 10 percent to 55,000 for CY21 citing higher corporate profits in GDP. The brokerage house also said that the Budget could drive Indian markets to catch up some lost ground with other emerging markets.
However, some other brokers are not quite as gung-ho despite the fact that the investment-led growth should support earnings. Nomura noted that while the Budget has reduced the risk to earnings, inflation concerns remain high and could impact earnings before interest, tax, depreciation and amortization. Nomura has kept a status quo on the Nifty 50 with a target of 14,680.
Others, such as Edelweiss Securities are also citing the fact that the post-budget pop has been quite sharp, which means valuations are again starting to look a bit more stretched than before.
Nevertheless, the markets are likely to remain primed up at least in the short run. However, D-street pros are also warning about a possible increase in interest rates, which could be negative for stocks in the longer run.
Let’s Talk About Pressures On Markets
A greater shift towards financing infrastructure and other capital expenditures through market borrowings is on the cards. The government is planning to increase the borrowing program to finance the higher fiscal deficit of 6.8 percent in FY22. This will lead to a considerable degree of pressure on bond yields if one goes by what the Street is suggesting.
Further, the private sector will also be jostling for debt capital as economic recovery and the capex cycle begins to shape up. That should keep the pressure on bond yields. D-street expects bond yields to move towards 6.25-6.75 percent in FY22. Already bond yields have inched up since the budget from sub-6 percent levels to about 6.12 percent lately. “Higher-than-expected bond yields pose the biggest risk to the market,” said analysts at Kotak Securities in its post-budget note.
Also, note that stock valuations have never been so high. The one year forward valuation of the Nifty 50 stands at about 22 times earnings.
In addition, pressures on equity markets could increase if inflation begins to raise its head, according to Street experts. Commodity prices are already on the upswing, which could raise input costs for companies and hamper earnings.
This coupled with the fact that bond yields could rise in FY22 to about 6.7 percent means that the bellwether indices face additional pressure to deliver earnings if valuations have to come down to realistic levels.