Analysts scale back price targets as rally defies fundamentals

Despite rally, over 60% of BSE 500 companies see their 12-month target price revised downwards

Nearly two out of three companies have seen a cut in consensus 12-month target price in the past one month even as benchmark indices have climbed to new record highs. Experts say analysts are tempering expectations as stock prices of most companies have rallied without much fundamental basis. 

According to the data, various brokerages have trimmed the one-year price targets of 302 companies in the BSE 500 index in the past one month. The cut in price targets has come ahead of announcement of September quarter results. Interestingly, shares of several companies are current trading much higher than their 12-month price targets. Experts say a downward revision was imminent as the current market levels do not suggest the actual fundamental strength of the market. 

The Sensex is trading at a trailing 12-month price-to-earnings (P/E) multiple of 24 times, much above its long-term average. On the other hand, corporate profit growth has remained in single digits for at least the past eight quarters. While sectors such as technology and telecom have seen a drop in growth rates, banks, especially the state-owned ones, are reeling under the pressure of increasing bad loans.

Illustration by Ajay Mohanty

These growth concerns had spooked the markets briefly in September when the benchmark indices fell four per cent each. But, there was a steep rebound in the markets because of aggressive buying by domestic institutions, especially mutual funds.

“The current rally has largely been driven by liquidity thanks to the strong buying by domestic institutions. However, in terms of fundamentals the markets are not in a great shape majorly on account of subdued earnings. We are still two-three quarters away from a revival in macroeconomic growth and corporate earnings. Until earnings growth picks up, markets could remain volatile,” said U R Bhat, managing director, Dalton Capital Advisors.

Another key concern for the markets at this juncture seems to be selling by foreign funds. Foreign portfolio investors have been aggressively trimming their exposure to Indian equities, with selling to a tune of $4 billion since August. Till now, this selling has not had a major impact on the Indian markets because of counter-buying by domestic institutions.

Strong buying by mutual funds has led to sharp gains in the broader market. Nearly a fourth of BSE 500 companies are currently trading higher than their 12-month analysts’ estimates. Companies such as Adani Transmission, Indian Overseas Bank and TVS Motor are trading 30 per cent more than their target price currently. Some of the blue-chips such as Infosys, TCS, Sun Pharma and Bharti Airtel are also trading five-seven per cent higher than their price targets. Market participants say investors shouldn’t get carried away with stock prices and should focus on the business model and sustainability of the company they are investing in. For instance, sectors such as telecom are currently under immense pressure due to various sector-specific headwinds. But, stocks from these sectors have done exceptionally well this year.

“The sharp relative movement in prices of large-cap stocks reflects the market’s reaction to short-term developments. Many Indian sectors and companies face high disruption and even existential threat in some cases but the stocks trade at rich or full valuations. Investors perhaps assume that these changes will take place in the distant future,” said Sanjeev Prasad, head of research, Kotak Institutional Equities.