At a time when UBS preferred to downgrade India to neutral, Goldman Sachs retained its overweight rating on Indian markets on increased confidence in corporate earnings recovery. The global investment bank expects earnings to grow 14 percent this year and 18 percent next year.
Tracking earnings trajectory, Goldman Sachs raised its Nifty’s 12-month target to 10,400 from 10,000 earlier. “We expect banks to recover from a downgrade cycle with upgrades to next year earnings driven by better NIMs/operating efficiency,” said the report.
Moreover, Goldman Sachs recent earnings revision Lead Indicator suggests EPS revisions in India may turn positive in coming months.
The global investment bank expects earnings outlook for Tech and Pharma to remain weak. Sectorally, the global investment bank favours domestic cyclical and banks over exporters.
It remains overweight on Industrials and has upgraded Banks, Autos to overweight but lowered Pharma and Tech to underweight. Top buy-rated stocks which are also in Goldman Sachs Conviction list include names like TVS Motors, HDFC Bank & ICICI Bank.
March Quarter suggests recovery:
The March quarter results suggest earnings recovery gathering pace while overall MSCI India 4Q results came largely in-line with consensus. The top line improved meaningfully this quarter which gives confidence to the bulls.
Sales (ex-financials) rose 15 percent on a year-on-year (YoY) basis which is highest in the last past 4 years. “Recovery in volume growth for consumer stocks, encouraging domestic order flow trends in Industrials, better-than-expected growth and margin trends in banks, and evidence of waning demonetization impact suggests earnings recovery is gathering pace,” said the Goldman report.
Even the managements are also seeing a recovery in demand. They are more confident of the up cycle. Based on earnings call transcripts of 40 companies, Goldman Sachs note that most companies are seeing a recovery in demand to pre-demonetization levels.
Capex-sensitive firms continue to see increasing opportunities from the govt. push on infrastructure while consumer-sensitive companies expect rural demand to pick-up.