Goldman Sachs has upgraded the Indian equity market, the first major foreign brokerage to do so after the Union Budget, citing a rebound in domestic growth in the second half of calendar year 2012 and “relatively attractive” valuations.
The Wall Street major has raised its rating on Indian shares to ‘marketweight’ from ‘underweight’ in its latest Asia-Pacific quarterly outlook report. Goldman Sachs has set a target of 6,100 for the 50-stock Nifty index of the National Stock Exchange (NSE) by March 2013, 15.6 per cent higher than today’s close of 5,278.20.
Goldman Sachs analysts believe global factors that have weighed heavily on India over the past year, such as European credit concerns, have largely abated and the domestic growth cycle may re-accelerate, heading into the second half of the calendar year. The uncertainty risk around the Uttar Pradesh elections and the Union Budget for FY13 are now behind us, they say.
“Further, we see upside to consensus earnings per share (EPS) growth estimates for 2013 and we find valuations relatively attractive in India, certainly more so than they’ve been since the global financial crisis,” their report says. The analysts believe growth in India will pick up over the next one to two quarters and the equity market would start to reflect these prospects in the coming months. They expect the Reserve Bank of India to cut the repo rate by 150 basis points during FY13, supporting the growth view.
Also, Goldman analysts believe Indian corporate earnings growth may surprise modestly to the upside in 2013 and say an upward revision cycle for 2013 earnings may materialise later this year.
The re-emergence of European concerns, perhaps centred around Spain or Portugal, and oil prices are the most significant risks to their positive view on India, Goldman analysts say. “Oil prices can impact the Budget and increase inflation, thereby diminishing the potential for repo rate cuts.”
According to them, beyond a threshold of around $120 per barrel, or when supply-side issues are the cause for higher oil prices, Indian equities appear to become concerned with these prices.
Interestingly, CLSA, another influential foreign brokerage, has retained its positive view on the Indian market after the Budget, but has reduced its Sensex target to 20,000 by March 2013, down from the earlier 20,800. “With the rising oil prices, risks to economic growth are rising but our optimistic view on (Indian) markets hinges on global liquidity and sustained affirmative policy action, which should improve the investment outlook,” CLSA’s Mahesh Nandurkar and Bhavesh Pravin Shah had said in a March 19 strategy note to clients.
