Goldman Sachs Rating: India upgraded to ‘overweight’

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Published: March 20, 2019 2:19:53 AM

Goldman Sachs has upgraded India back to ‘overweight’ from ‘marketweight’ as the Indian market has been witnessing a ‘catch-up’ rally amid expectation of a potentially stable government at the Centre.

Goldman Sachs Rating: India upgraded to 'overweight'Goldman Sachs Rating: India upgraded to ‘overweight’

Goldman Sachs has upgraded India back to ‘overweight’ from ‘marketweight’ as the Indian market has been witnessing a ‘catch-up’ rally amid expectation of a potentially stable government at the Centre.

The foreign brokerage expects Nifty to hit 12,500 level in the next 12 months, up from its previous target of 11,700. Goldman Sachs had downgraded India to ‘marketweight’ in September, citing near-term risks related to macro factors and earnings, stretched valuations and election-related uncertainties. The latest target implies about 6.5% upside from the index’s record high of 11,738.50 points.

“On a full calendar-year basis, we expect earnings growth in India to pick up to 16% this year and 14% next year, which should drive
Nifty’s outperformance,” the brokerage said in a note dated Monday.

India’s sharp underperformance in the first two months of this year, signs of an uptick in demand and improving asset quality trends leading to a better-than-expected Q3FY19 earnings and pick-up in foreign flows led the brokerage to upgrade their view. The risk/reward appears favourable again for India, the brokerage note added.

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The rally this year has been driven by purchases of overseas investors that have bought stocks worth nearly $5.6 billion, highest among the seven emerging markets that provide exchange data on FII activity. This year’s inflow is a big swing from last year’s outflows of $4.2 billion. On the other hand, between January and now, the domestic institutional investors (DIIs) sold shares worth $160 million, Bloomberg data showed.

The brokerage said the current domestic macro and market set-up looks better on most metrics compared with the 2014 rally, but current starting point for valuations is higher. “At 18x P/E, current P/E looks ‘fair’ relative to the macro backdrop, but we see potential for valuation overshoot in the near term,” it said.

However, India remains among the most expensive markets in the world. At 11,532.40, the benchmark Nifty trades at a price-earnings(PE) multiple of 17.9 times to the estimated one-year forward earnings. This compares with 10.7 times for the Kospi and 15.2 for the Jakarta Composite. Brazil’s Bovespa and the Shanghai Composite are trading at a price-earnings multiple of 12.2 and 11.2, respectively, data from Bloomberg show.

During the past 15 years, Indian equities have traded at an average PE premium of 26% to the region, which is in line with the relative GDP growth differentials between India and the rest of the region.

While the brokerage upgraded state-run banks, industrials and auto sectors to ‘overweight’, it downgraded technology, metals and non-banking financial sectors to ‘underweight’.

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