UBS sees Nifty at 9,600 by 2015-end

Nifty could slip to 7,500 if their expectations of the earnings growth recovery are not met, UBS says. Bharti Airtel, HDFC Bank, Reliance Industries, ONGC among top picks

 

UBS, the global research and brokerage firm, expects the Nifty to touch 9,600 by 2015-end, a rise of around 15 per cent from the current levels. The move, UBS believes, will be led by an improvement in corporate earnings and an improvement in the overall economy.

In a November 11 report, ‘India Market Strategy Outlook 2015: Bull market to continue’, authors Gautam Chhaochharia and Sanjena Dadawala suggest the economic growth recovery underway will likely sustain current valuations, especially as it starts manifesting in both macro (economic growth, inflation) and micro (corporate earnings) data points.

“Based on our top-down 15 per cent/18 per cent growth forecasts for FY16/FY17 and likely premium valuations of around 16x one-year forward PE, our Nifty target for end-2015 is 9,600,” the report says.

However, if their expectations of the earnings growth recovery are not met (with only 10-12 per cent growth in corporate earnings), and the market de-rates towards 14x one-year forward PE (price-to-earnings), the Nifty could decline to 7,500 levels. Unlike the past three years, they expect the consensus earnings growth estimates of 15 per cent plus for FY16 and FY17 to be met, and ultimately, it is earnings momentum that drives markets.

In the near term, however, UBS suggests that the markets could start looking for tangible indicators such as earnings or macro parameters, beyond merely headlines of hope from future reforms. Though still relevant, the impact of positive headlines might gradually diminish. On the flip side, a lack of headlines or a delay in expected reform deadlines may be taken negatively by the markets, as was seen recently when the government delayed its decisions on coal/gas.

  Inflation and reforms

Supported by both macro (fiscal/monetary) and micro (food/wages) policies, UBS expects consumer price inflation (CPI) to moderate to 5.7 per cent in January 2016, lower than the Reserve Bank of India’s (RBI’s) target of 6 per cent.

“We expect monetary policy to lag inflation moderation and the Reserve Bank of India (RBI) to keep policies relatively tight until FY16. Ten-year and short-term market interest rates should react much earlier and more sharply,” the report says.

UBS expects more policy action in 2015, including further progress on India’s ‘three arrows’—Aadhaar unique identification number, GST tax reform (a possible game changer) and dedicated freight/industrial corridors. Besides, reforms related to liquefied petroleum gas (LPG)/urea, state-owned (SOE) banks, coal/power and land are also likely. According to the report, Brent crude sustaining at $85 per barrel could mean a $20-billion bounty for India (one per cent of the gross domestic product), all other things being equal.

Top picks

UBS remains overweight on banks (private/SOE), oil and gas, power, telecom and media sectors; underweight (UW) on autos (two-wheelers) and consumer staples. It has maintained a neutral stance on the four–wheeler and cement sectors.

Meanwhile, it has downgraded small- and mid-caps to “neutral” from “overweight” stance and cut IT (information technology) services to “underweight” from “neutral” besides turning neutral on consumer discretionary and pharmaceuticals sectors (from UW). Their most preferred stocks are Asian Paints, Bharti Airtel, HDFC Bank, ICICI Bank, LIC Housing Finance, Maruti Suzuki India, Multi Commodity Exchange of India (MCX), Oil and Natural Gas Corporation (ONGC), Power Grid, and Reliance Industries.

“We least prefer Adani Power, Cipla, Hero MotoCorp, Hindustan Unilever, Infosys, Jubilant FoodWorks, and United Spirits,” adds the report.