A combination of domestic and global economic problems has once again prompted Indian brokerages to trim their year-end targets on the Sensex and the Nifty. Top firms, such as Barclays, Macquarie and Ambit Capital, cut their respective Sensex and Nifty target by 5.6-12.5% on Friday, citing weakness in second quarter corporate earnings.
Barclays has revised its 12-month Nifty target to 9,642 from 10,219. Macquarie has lowered its December 2015 target to 8,700 from 9,600, while Ambit Capital cuts its March 2016 Sensex target from 30,000 to 28,000 with a high risk of it further falling to 22,000 levels.
Ambit Capital advised investors to “exit the fantasy, enter the reality”. In its note, Ambit researchers, led by Saurabh Mukerjea, said: “We we cut not just our FY16 GDP growth estimate, but also our end-FY16 Sensex target. There is a high risk of the Sensex dropping to 22,000 as the odds appear to be in favour of a continued yuan devaluation. The combination of an enfeebled banking system, a sliding real estate sector and a PM determined to reset the way the Indian economy works makes India a risky investment destination.”
India’s economic growth decelerated to 7% in the first quarter of fiscal 2016 compared to 7.5% in the previous quarter and 6.7% from the corresponding quarter last fiscal. This belied all expectations of economic revival that the government was pinning its hopes on.
Barclays cut its 12-month forward Nifty owing to postponement in earnings recovery. The British multinational investment bank observed that Indian earnings have now remained stuck in single-digit growth territory for the past three years and were following a similar pattern with downgrades to FY16 estimates persisting.
“Weak revenues are ostensibly to blame, though a closer look indicates top-down issues led by high real interest rates and a negative WPI culminating in lacklustre IP growth are the real culprits,” said a team of Barclays researchers, led by Bhuvnesh Singh.
However, Barclays expects the economy and earnings to rebound in the second half of fiscal 2016, led by consumer (staples and discretionary), financials, healthcare and capital goods sectors given the positive expectations from the domestic economy.
Australian investment bank Macquarie also cited weak earnings, but highlighted that India appeared the most attractive among EM countries, being a commodity consumer, a credible reform story and with a relatively high level of monetary independence.
“Risk on trade continue as the China government takes action and the US Fed pushes the timetable for a rate hike.
This has created a window of opportunity for the Indian central bank to cut interest rates in September/October. Government spending to pick up in Q3 to boost sentiment. Market seems well supported,” said Rakesh Arora, MD and head, research, Macquarie Capital Securities.