According to investment firm Nomura, growing prices, consumer pessimism, and fears about future development might still continue to negatively affect the Indian stock market.
It does not seems to be the case that GDP growth has a direct association to the rise of wage and salary income, at least in the near term, according to Mukherjee.
A little improvement in business profit has been seen so far, he added. Mukherjee said that there is considerable room for business profits to bounce back substantially after the epidemic. Banks and metal stocks are expected to boost profits on the Nifty.
Nomura has given Infosys a buy rating and a price target of 1,615 rupees ($22.10) per share. Based on Wednesday’s closing price, this implies a 17 percent potential upside for the stock.
Sun PharmaceuticalS Industries has a buy rating and a price target of Rs. 730, representing an almost 8% increase.
Mahindra & Mahindra has a buy rating and a target price of Rs. 1,165, implying a 44 percent increase.
Nomura has a buy rating on Reliance Industries and a price target of Rs. 2,400, implying a 9 percent upside. The company is also among the top picks of investment banks Goldman Sachs and Morgan Stanley.
Max Financial Services, the holding company of the non-bank private life insurance firm Max Life Insurance, also has a buy rating from Nomura. The stock’s price target is Rs. 1,050, representing a nearly 11% increase.
Prospects for the Industry
Nomura is overweight in the following sectors: information technology, health care, infrastructure and capital goods, metals, and selected financials. It is underweight in automobiles, consumer goods, oil, and gas.
The bank anticipates that structural changes will enable stronger growth in IT and health care, which will boost stock valuations.
Mukherjee explained that the IT services growth trajectory has improved and may be better than expected due to the pandemic’s impact on spending. He noted that India has one of the lowest rates of health-care consumption among its peers, and that government efforts to improve the sector could help.
“The other sector that we feel positive about, given that we still have valuation comfort,” he said, adding that Nomura is working on a base case assumption that India’s growth will be led by investments.
Mukherjee stated that earnings in consumer staples and discretionary stocks were elevated and that demand could be weaker than expected. Higher commodity prices may also result in a compression of EBITDA margins, or earnings before interest, taxes, depreciation, and amortization, he added. EBITDA is one indicator of a company’s overall financial health.
Luxury goods, entertainment activities, and automobiles are examples of non-essential goods and services in the consumer discretionary sector. Consumption in this sector typically rises in tandem with rising disposable income.
Concerns about inflation
Market analysts have recently focused on inflation, which is said to have eased to a three-month low in April. Many Indian states imposed localized lockdowns to combat the pandemic, raising concerns about potential supply issues and, as a result, higher prices in the short term.
“Inflation expectations in India, and globally, for example, are rising,” Mukherjee said. “That is definitely one concern that can have a negative impact on how equities valuation multiples play out.”
Higher raw material prices would translate into higher costs for many businesses if inflation remained high. Mukherjee stated that consumer durables, automobiles, and cement are likely to be affected by inflationary pressures.
Inflation could also force central banks to raise interest rates, putting more pressure on banks. Higher interest rates benefit financial institutions by allowing for wider margins, which boosts profitability.
As a result, Nomura is selective in its approach to Indian bank stocks, holding the majority of the large banks in its portfolio, and is marginally overweight in the sector, according to Mukherjee.