FIIs bought over $1 billion of local equities in past seven sessions

markets

Foreign investors turned net buyers of Indian shares over the past couple of sessions and brokers said the renewed interest may have to do with valuations in many sectors looking reasonable after a long spell.

Foreign investors bought about $1 billion in domestic equities from March 28 to April 10, according to data from National Securities Depository Ltd.

Foreign institutional investors bought Rs 342.84 crore worth of shares on April 11, provisional data from the National Stock Exchange of India showed. They were net sellers of about $2.74 billion so far this year. In 2022, FIIs sold shares worth $13.41 billion.

Both Sensex and Nifty gained for the seventh consecutive session and hit nearly one month high. From 28 March till date, Sensex and Nifty rose 4.5 percent each while BSE Midcap and SmallCap climbed 4.7 percent and 6.8 percent. Year to date, Sensex and Nifty fell 1.1 percent and 2.12 percent, respectively, while BSE MidCap and SmallCap lost over 3 percent each.

Foreign brokerages Jefferies India and Goldman Sachs said the recent drop in domestic share prices made valuations attractive. Although the market may experience fluctuations in the short term due to increased global uncertainty, more significant declines present an excellent opportunity for medium-term investors in the coming months, analysts said.

According to Bloomberg data, the BSE Sensex currently trades at 17.05 times its one-year blended forward earnings, a discount of about 100 basis points to its 10-year average of 18 times. The Nifty 50 index trades at 17.50 times its one-year forward earnings, below its 10-year average of 17.93 times.

The MSCI India trades at a forward P/E ratio of 19x, which is 13 percent higher than its long-term average. However, it is about 20 percent lower than the peak multiple of 24x a year and a half ago.

Fair valuations

"This puts it closer to our macro model's fair value estimate of 18.5x. The relative premium of MSCI India to the region has also decreased, halving from its peak of about 100 percent in 4Q last year to 45 percent, compared to its historical average of 30 percent," Goldman Sachs said in a recent report. "We stay marketweight India given n/t cyclical considerations of slowing domestic growth and less sensitivity to China growth recovery. We expect NIFTY to reach 20,000 in 12-months (Mar 2024), driven by 17 percent/15 percent earnings growth in 2023/24, implying 15 percent local price returns. Returns will likely be backloaded."

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An analysis of Nifty 100 stocks indicates that 56 of them trade at a discount to their long-term average valuation, based on either a 10-year period or since their listing. On a consensus basis, less than a quarter of the companies trade at more than 15 percent above their long-term valuation averages.

According to Jefferies India, the financial sector including banks and insurance companies, original equipment manufacturers in the automotive industry, and several pharmaceutical companies are among those with a significant discount over their average valuations.

Goldman prefers domestic cyclicals over global cyclicals and remains overweight on banks and investment cyclicals such as industrials and cement. It downgraded insurance to market weight and upgraded utilities to market weight. Goldman said its funding areas of focus are infotech, nonbanking finance companies, and consumer durables and retail.

Brokerage firm Bernstein said there is room for rallies led by various factors in the near term. Financials, real estate, and cement are expected to perform well during this rebound, while staples and utilities are expected to underperform.

"The current situation reflects the emergence of support at the base, following the impact of supply constraints, Omicron-related disruptions, and rising commodity prices, particularly in the context of the Ukraine conflict. The latest data indicates a positive trend in the Index of Industrial Production and eight core industries during January and February, indicating that the manufacturing Gross Value Added (GVA) growth may return to positive territory in Q4FY23E," Bernstein said in its latest report.

Despite the challenges, the services sector, led by a rebound in tourism and strong IT exports, continues to perform well, contributing to a services trade surplus of $15 billion, which offsets the goods trade deficit and increases the possibility of a current account surplus.

Read: March CPI inflation seen at 15-month low of 5.7% due to favourable base

The recent decline in commodity prices, with crude and coal prices down by 33 percent and 60 percent, respectively, from their CY22 peak, and the expected peaking of interest rates are other factors driving optimism about the macroeconomic outlook, Bernstein added.

According to Mitul Shah, head of research at Reliance Securities, India has better growth and corporate earnings prospects than other economies. While China, Brazil, and South Africa have their own challenges related to debt, demographics, geopolitics, forex reserves, and political stability, India's macros have been resilient, making it a bright spot in a world that is slowing down.

Investors are regaining faith in the Indian markets due to moderation in inflation, the expected peak of the interest cycle, and one of the highest economic growth rates for FY24.