Mukherjee feels the market could trade between 17x and 18x one-year forward earnings
Nomura India has set a target of 12,900 for Nifty by March 2020, driven by pick up in the investment cycle and lower bond yields.
"We value the market at 17x FY21 forward earnings (up from 16x) to arrive at a target of 12,900, representing upside of 9 percent from current levels," Saion Mukherjee, Managing Director and Head of Equity Research-India and Global Markets at Nomura India said.
Today, Nifty closed at 11,662, up 74. 25 points or 0.64 percent. In the last one month, Nifty has shed almost 2 percent. Mukherjee feels the market could trade between 17x and 18x one-year forward earnings.
Mukherjee said the rationale behind the Nifty target is based on the expectation of valuation support from lower bond yields and a pick up in the investment cycle.
Further steps taken by the government and the Reserve Bank of India to infuse liquidity into non-banking financial companies (NBFCs) should allay concerns on the escalation of the credit crisis restricting a deeper economic slowdown, he added.
Mukherjee said a weaker monsoon and unwillingness to lend in the banking sector may pose as the biggest risk for the market.
"Further, disruptions such as geopolitical risks which would push up oil prices could also risk the estimates," he added.
In terms of sectors, the Japanese brokerage firm is overweight on financials including banks and insurance stocks, infrastructure and healthcare. Among financials, the brokerage firm’s portfolio is inclined towards 'select PSUs (public sector utilities)'.
"The top pick is a PSU and then we have corporate banks, which includes private corporate banks," Mukherjee said.
Nomura expects quality financial intermediaries to benefit from the lower cost of funds, market share gains and improving asset quality.
The brokerage house is constructive on infrastructure and construction companies given the government’s focus on infrastructure segments.
In the infrastructure space, apart from construction companies, Nomura is also looking at companies related to water and water purification projects. The firm considers healthcare as a turnaround prospect supported by attractive valuation.
Nomura is running an underweight position in consumption and automobile companies. Valuations in the consumption space are 'very rich', feels Mukherjee.
"In the consumption space along with very rich valuations, earnings growth expectations are also very high," he added.
On the auto front, the firm expects growth slowdown and structural challenges in the long run. The introduction of electric vehicles (EVs) also presents risks to the earnings and valuation multiples.When asked about the earnings growth trajectory, Mukherjee said in FY20, earnings growth will be stronger than FY19.The Great Diwali Discount!
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .