Indian equity markets stand at a crossroads. Will the benchmark indices be pulled down by uncertain global macros and tightening liquidity, or will the softening yields and political populism propel them higher? Analysts of Ambit Capital are placing their bets on the bulls.
According to them, markets are not expensive and the fair value of the Nifty can reach around 20,900 by March 2024.
This estimation is based on an expected earnings per share (EPS) of Rs 940, a 10-year yield of 7.1 percent, and the market trades at a minus-2.6 EYBY gap valuation, which is in-line with the long-term average.
EYBY gap measures the attractiveness of equities with respect to bonds. Higher the earnings yield as compared to the bond yield, the better the returns.
Where is 10-year bond yield headed?
Ambit believes that the 10-year yields are likely to fall. It had previously assumed a yield of 7.3 percent, but has now revised it to 7.1 percent as of March 2024.
The rates on swaps, which are an indicator of bond rates, have decreased significantly since February 2023, suggesting the possibility of rate cuts in the second half of the fiscal year 2024.
According to Ambit, historical data shows that in the six months leading up to general elections from 2004 to 2019, yields tend to remain stable.
There is a strong demand for Government Securities (G-Sec) from life insurance companies, and it is expected that banks' demand will increase due to a decrease in the Liquidity Coverage Ratio (LCR).
Additionally, the difference between the repo rate and the yield at the end of a rate hike cycle is usually smaller than the 10-year average or median. Taking all these factors into account, it is highly likely that yields will remain stable or decrease further, Ambit's analysts say.
Which way are earnings headed?
Ambit's analysis indicates that the earnings estimates for FY21-23 were strong, but it may be challenging to maintain this trend in FY24. The banking, financial services, and insurance (BFSI) sector, a key contributor to FY23 earnings growth at 195 percent, will likely slow down to 43 percent in FY24.
"We expect banking net interest margins to reduce and any decline in policy rates in 2H can put more pressure," they noted.
There is also risk to the earnings growth of the information technology (IT) due to recessionary pressure in the West, and any delay in China recovery will hit metals, and oil and gas sectors, too.
While the consensus estimate for Nifty EPS is Rs 991, Ambit's FY24 EPS estimate stands at Rs 940.
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