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The Indian market might be trading at record highs but the macro data is not supporting the euphoria on D-Street. The valuations, which now look stretched after recent rally, offers limited upside room for the Nifty from current levels.
The Nifty trades at 17.5x March 2018 consensus earnings or 4 per cent top percentile over the last 10 years, Mahesh Nandurkar, executive director and India Strategist at CLSA said in a note. The 12-month forward Nifty target which is roughly around 9,800, offers 7 per cent total return from current levels.
The Asia-focused broker is overweight on consumer discretionary, financials, energy, materials and IT. The top buy calls from CLSA include stocks like ICICI Bank, IndusInd Bank, Zee Entertainment, Vedanta, HCL Technologies and Power Grid.
CLSA expressed its concerns on the high-frequency macro data which does not auger well for the March quarter results. An analysis of 19 high-frequency data shows that economic activity in February was only marginally better than January, which is a bit disappointing as the expected post-remonetisation recovery is taking longer than we anticipated to play out.
The February 2017 monthly numbers suffer from the year-on-year (YoY) handicap of a leap year in the base. However, adjusting for the same, monthly economic indicators only marginally improved on a sequential basis, said the note.
“We expected a faster improvement post remonetisation. Credit growth staying weak at 5 per cent is a key source of worry. However, we remain optimistic on railway freight for cement surging to 8 per cent for Feb, although the month of January saw this diverging from overall cement demand, it said.
The two-wheelers and commercial vehicles trend show a consistent improving trend. Overall, this trend doesn’t augur well for 4Q results, CLSA said. Bank credit growth is also worrying with growth staying near multi-year low levels of 5 per cent.
The recent uptick in WPI (over 7 percent, highest in 3.5 years), on the back of higher commodity prices, should ideally drive working capital demand higher but this is not yet visible in the data. M3 growth at 6 percent in Feb was the same as Jan and continues to be at multi-year lows.
Railway freight volumes have shown an improvement in Feb (over 3 percent) but ports volumes have slipped which stands at just over 1 per cent, weakest in 15 months, although on a high base.
The manufacturing PMI for February was flattish (50.7) compared to Jan (50.4), implying continuing weak growth. Services PMI has come out of three months of negative reading but is only marginally positive (50.3).
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