Jefferies sees 15% correction in Indian markets; adds Zomato to portfolio

The pullback in the Nifty from its recent lows looks unsustainable, said analysts at Jefferies in a recent note even as they acknowledged the improved US outlook on lowered inflation expectations and lower recession risks. Among stocks, Jefferies has removed/reduced exposure to Gail, Gland Pharma and Tech Mahindra (TechM), while introducing Zomato, Thermax, LIC Housing and Indian Hotels to their model portfolio.

"India's 10-year G-sec rate has fallen from the recent peak of 7.62 per cent in June 2022 down to 7.35 per cent. However, the market 12-month forward price-earnings (PE) has gone up to 19.3x, driving the Bond yield – earnings yield gap up to 2.2 percentage points (ppts), which is 113 bps higher than average. A potential mean reversion would imply a 15 per cent correction,” wrote Mahesh Nandurkar, managing director at Jefferies in a co-authored report with Abhinav Sinha.

In the past one month, the S&P BSE Sensex and the Nifty50 have gained around 8 per cent each with a large part of these gains coming via the BFSI route. The rally in the mid-caps has been sharper during this period. The Nifty Midcap index has surged its larger peer with a gain of around 10 per cent, data show.

On its part, the US Fed has hiked its benchmark rates by 225 basis points (bps) so far, but the tone on further hikes, analysts believe, does not appear that hawkish, implying that the Fed might go slower. The US long-term inflation expectations remain under the psychological mark of 2.5 per cent. The US 10-year yields, too, have also corrected by 70 bps from the recent peak to 2.8 per cent, bringing down the risk-free rate globally, including in India. The Dollar index is also down 2 per cent from peak, implying favourable sentiment towards emerging markets.

This improvement in overall mood, Nandurkar and Sinha believe, is already reflected in foreign portfolio investor (FPI) flows into India that are up $2.4 billion since reversing in mid-July. “For this near-Goldilocks situation (no US recession and economy holding up well but yet a dovish Fed) in the US to sustain, will require a lot of fine balancing act,” they wrote.

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Corporate earnings

Meanwhile, corporate earnings, Jefferies cautioned, have already started trending downwards with Nifty EPS estimates for FY23/24 cut 2.2 per cent/1.7 per cent over the results season.

"Our analysts have revised earnings down for 48 per cent of the 106 coverage stocks for which results have come out, so far," Nandurkar and Sinha said.

Those at Motilal Oswal Securities, too, suggest that the earnings growth in the June 2022 quarter (Q1FY23) has been subdued and led solely by BFSI.

"Oil & gas and automobiles have been laggards, while metals and cement sectors posted weak numbers as expected. Heavyweights, like such as Reliance and Tata Motors, which posted weaker weaker- than than-expected expected performance, dragged the Nifty earnings," wrote Gautam Duggad, head of research for institutional equities at Motilal Oswal Financial Services in a recent authored note with Deven Mistry.

Profit booking at play as indices end day on a flat note

Benchmark BSE Sensex and Nifty closed on a flat note after a volatile session on Wednesday profit booking in IT and realty shares negated gains in metal and oil & gas stocks. The 30-share BSE Sensex ended 35.78 points or 0.06 per cent lower at 58,817.29, while the broader NSE Nifty inched 9.65 points or 0.06 per cent higher at 17,534.75. The market remained range-bound for the most part of the session as investors kept their exposure low due to weak global cues, traders said.

Bajaj Finance was the top loser in the Sensex pack, shedding 2.66 per cent, followed by NTPC, HCL Tech, Wipro, Asian Paints, Ultra Cement and SBI. On the other hand, Tata Steel, Bharti Airtel, ICICI Bank, L&T and IndusInd Bank were among the gainers. Equity markets were closed on Tuesday on account of 'Muharram'.

Elsewhere in Asia, bourses in Shanghai, Hong Kong, Tokyo and Seoul ended with significant losses. Equities in Europe were trading with mild gains in mid-session deals. Meanwhile, international oil benchmark Brent crude declined 1.05 per cent to USD 95.30 per barrel. Foreign institutional investors (FIIs) were net buyers in the Indian capital market as they purchased shares worthRs 1,449.70 crore on Monday, as per exchange data.