Nomura sees Nifty at 11,380 by December 2018; HDFC Bank, RIL among top bets

Nomura expects the consolidated earnings for Nifty companies to rise 51% over FY18-20, largely driven by low base of financials.

Global research house Nomura sees a limited upside for the markets from here on. Their recent India Strategy report co-authored by Saion Mukherjee, Neelotpal Sahu and Sanjay Kadam, pegs the Nifty50 target at 11,380 levels by December 2018.

“We remain cautious on valuations. Nifty’s 12-month forward price-to-earnings (P/E) multiple, at 17.5x, is close to more than one standard deviation above its eight-year average on expected earnings. The gap between 10-year government bond yields and earnings yield has expanded and is close to the lowest level since September 2014, indicating relative overvaluation. Our Nifty target of 11,380 is based on a forward multiple of 16x on December 2018F earnings," the report says.

Recently, UBS pegged its December 2018 base case target for the Nifty to 10,500, implying one per cent downside from the current levels.

“Our end-2018 Nifty base/upside/downside scenarios of 10,500/11,900/8,800 imply unattractive risk-reward from current levels for rest of the year. Our base case forecast for FY19 is of 13 per cent growth in Nifty earnings, which along with expectations of 15 per cent growth in FY20 and 18x 12-month forward PE multiples forms the basis of our end-2018 Nifty base value of 10,500,” Gautam Chhaochharia, head of India research, UBS Securities had said.

Nomura, on the other hand, expects the consolidated earnings for Nifty companies to rise 51 per cent over FY18-20, largely driven by the low base of financials. 

"Based on a bottom-up analysis of 112 companies in our coverage, March 2018 quarter earnings (ex-financials) have been largely in line with our estimates. Ex-financials, EBITDA grew 24.8 per cent year-on-year (y-o-y), largely in line with our estimate of 24 per cent y-o-y. NIFTY universe reported earnings growth of 8 per cent y-o-y in Q4FY18. We forecast ex-financials earnings growth for Nifty at 37 per cent over FY18-20F," the report says.

In terms of sectors, Nomura remains overweight on financials (particularly retail private banks and insurance), autos, oil and gas, infrastructure/construction and healthcare. Information technology (IT), consumer staples and cement are its key underweight sectors.

Ashok Leyland, GAIL, HDFC Bank, ICICI Prudential Life Insurance, Larsen & Toubro, Mahindra & Mahindra, Maruti Suzuki, PNC Infratech, Reliance Industries (RIL) and Shriram Transport Finance are the 10 stocks that Nomura has a buy rating on.