We continue to have a positive view of the domestic market. At the start of the year, we had projected a 10 to 12% return for the Nifty 50 index, setting a base target of 23600. However, due to stronger-than-expected earnings growth, we are revising our target upward to 24350, also factoring in marginal upside in valuation. Nifty EPS grew by 23.8% in FY24 and are forecast to achieve 13.5% growth in FY25. Looking forward, we anticipate an additional 4 to 6% potential return for the Nifty50 over the next six months, based on our updated targets, with a best-case scenario target of 25000. While short-term upside may be limited due to the timeframe, there remains significant potential for sector-specific gains over the long term, particularly in emerging areas.
Looking at the long-term outlook for the Nifty 50, we envision a target of 26500 by December 2026. The market estimates a stable earnings growth of 12 to 14% for the next 2-3yrs in anticipation of the average 7% GDP growth of India. The recent decrease in volatility, attributed to the formation of a stable coalition, has bolstered market confidence. As investors await the upcoming budget, there is optimism for a prudent fiscal policy that balances economic growth objectives with populist measures.
Upgrade in earnings growth
As of 1st Jan 2024, the EPS forecast for Nifty50 stood at Rs 1,240, which has marginally increased to Rs 1250. This is because the increase in the base year of FY24 was led by better than estimated business growth. The latest Q4FY24 results were notably above forecasts, with PAT growing by 17.5% compared to an anticipated growth of 10%. This exceptional performance has significantly improved the market’s outlook for the Nifty50, indicating a strong likelihood of further expansion in FY25.
As of January 2023, the forecasted GDP growth rate for FY24 was 6.5%. However, the actual GDP growth exceeded expectations, reaching 8.2%. There is optimism that this trend may continue into FY25, as indicated by the RBI’s upgrade in FY25 GDP growth from 7% to 7.2% in the June policy. The RBI expects Q1FY25 GDP growth to be at an upside of 7.3%. Concurrently, market expectations for Nifty50 earnings growth in FY25 range between 10% and 15%; currently, we are factoring at 13.5%.
The future sector wins will be Consumption and Capex
The consumption sector stands to benefit significantly from La Niña conditions and increased government spending. Last year’s monsoon was below normal at 94.4% of the Long Period Average (LPA). Additionally, the southwest monsoon exhibited irregularities, including a delayed onset, and in August, a crucial period for the crop season, it received minimal rainfall at 64% of LPA. The withdrawal season experienced delays, impacting the sowing of the rabi crop. Simultaneously, the global El Niño phenomenon caused a severe heatwave in India during FY24. This climatic pattern altered the environment, reducing rainfall and causing higher-than-average temperatures in winter and summer.
The combined impact of insufficient rainfall and the El Nino phenomenon severely affected water reservoir levels, which are currently below the 10-year average. Particularly in the southern region, reservoirs are significantly impacted, with storage levels at 48% of total live capacity. Approximately half of India’s total cultivated area depends on monsoon rains, which contribute nearly 40% of the nation’s total food production.
The rural economy has already been under stress since Covid-19. Demand has not recovered due to disruptions in income, reduced inter-state migration, high inflation, increased rural unemployment, and a decline in agricultural activities. However, there are indications that this trend could reverse in FY25. The IMD forecasts the southwest monsoon to be above normal. Additionally, the weakening of El Nino conditions, (transiting to neutral) and the likelihood of La Nina situations during the July-September period (chances of 60%-70%), along with the emergence of a positive IOD (Indian Ocean Dipole), will enhance the southwest monsoon and suitable environment, benefiting the rural sector. This combination of factors is anticipated to have a dual positive impact on rural demand. A robust monsoon season, along with increased government spending, is expected to benefit sectors heavily dependent on rural consumption, such as FMCG and other consumer-driven sectors.
What matters for Infra and Capital Goods
Concerns about political stability eased with the formation of a stable coalition. The newly elected government’s 100-day agenda to award 3,000 km of highway projects underscores its focus on infra development. The outlook for EPC players is strong, with a 20% increase in the daily road construction rate. Fund mobilization from NHAI is on the rise, and the high allocation of Rs 2.78 trillion in FY25 is likely to expand companies’ order books.
Similarly, in the infra space, segments like railway, cement, and affordable housing will be major beneficiaries. As of February 2024, the government has spent 85% on FY24 capex. Additionally, the government has outlined a plan to purchase Rs 1 trillion worth of coaches over the next few years. The modernization of 40,000 normal bogies into the standard Vande Bharat bogies and an increase in the production of rolling stock are expected to further elevate the sector’s profile.
The Cabinet’s approval of 3 crore rural and urban homes under the PMAY scheme is anticipated to have a substantial multiplier effect due to its connections with over 250 ancillary industries. The government’s strong infra push by NIP, GATI Shakti, and budget outlay, robust order book, and healthy bid pipeline are expected to witness strong business in the coming years.
On the valuation front, the BSE Infra Index, like the NSE Infra Index, is currently trading at a one year forward P/E of 18x, historically at premium, but below the country valuation. Given the robust business and earnings growth outlook, such industries deserve to trade at a premium and even surpass broad valuation in the next 1-3 years.
Coming to capital goods, the FY24 budget estimates an effective capex of 13.7 lakh crore, a 27.7% CAGR from FY22 to FY24. India’s GDP is expected to grow at an average 6 to 7% CAGR in FY24–30, with private consumption expenditure estimated to grow at a faster pace than government expenditure. The Production Linked Incentive (PLI) scheme is anticipated to attract investments worth Rs 3-4 trillion over the next 4 years, facilitating the creation of 200,000 jobs.
The average orderbook-to-sales ratio of the BSE capital goods index constituents is a comfortable multiple of 2x. On average, the topline of industry constituents is expected to grow at 18% CAGR in the FY24–26 period, while the EPS is expected to grow at 24% CAGR. As a risk, margin contraction could arise from rising raw material costs as most of the metal prices continue to remain at elevated levels. However, a high-volume growth forecast will help to maintain a healthy operating margin. On valuation terms, infra stocks are in a better position compared to capital goods, as indicated above. While capital goods are currently trading at an all-time high, one-year forward of 40x P/E. However, such premium valuations are bound to stay due to an optimistic outlook. Buy in dip would be a better strategy in capital goods stocks.
