- India’s recovery looks increasingly fragile due to upside risks in inflation and an aggressive RBI. Once growth disappoints, we expect earnings for Indian equities to be cut.
- We expect steeper EPS downgrades moving forward due to domestic and global macro risks, as well as impending profit headwinds. EPS cuts should first come from cyclical sectors with a global revenue exposure.
- Valuations are currently stretched and we see elevated risk of contraction. At a forward PE of 21.0X, it is trading at a 17% premium to the long-term average. The region is now the most expensive market across major EMs.
- We expect considerable near-term downside given the risk of valuation contraction and EPS downgrade. Longer-term upside potential is also muted (10% by March-2025).
- Despite near-term headwinds, India’s secular growth potential remains intact, driven by secular domestic tailwinds and positive reforms. This supports a case of re-entry once the risk-reward balances.
Chart 1: Sensex Index near an all-time high despite the market gyration this year
1. Unabating macro headwinds a potential roadblock to recovery
Chart 2: Driven by strong inflationary pressure from food prices, India’s CPI remains above RBI’s upper limit (CPI target)
Chart 3: RBI has been drawing down on its USD foreign reserves to defend the rupee but to little effectiveness
2. Steeper EPS downgrade incoming
Chart 4: Indian equities tend to experience EPS downgrade across the fiscal year
Chart 5: Margins are peaking and are starting to decline
Chart 6: Historical EPS estimate trajectory imply steeper downgrades in the coming quarters
3. Valuations have surged and are trading at elevated levels
Chart 7: Forward PE multiple has become pricey again after the recent rally; Current level are around pre-Covid peaks
Chart 8: Indian equities are trading at a larger premium relative to Asian ex-japan equities, even when compared to the past five years
Chart 9: Indian equities are the most expensive market across major emerging markets
Secular growth opportunities remain intact despite headwinds
Table 1: List of major reforms and secular domestic tailwinds
|
Reforms and secular domestic tailwinds |
|
|
Demographic dividend |
|
|
Middle-class transformation |
|
|
Evolution in consumer behavior |
|
|
Reduced corporate tax rates |
|
|
Strong CAPEX push |
|
|
Supply-chain diversification |
|
|
Production-linked incentive scheme |
|
Growth potential held back by unfavourable risk-reward
Table 2: Implied upside/downside based on sensitivity of Sensex index to EPS revision and forward PE ratio
Table 3: Projected upside for Indian equities remain muted over the next 1-2 years
|
India (Sensex Index) |
FY2022 |
FY2023 |
FY2024 |
FY2025 |
|
PE ratio (X) |
25.3 |
22.9 |
19.9 |
17.3 |
|
Projected earnings growth (YoY %) |
33.6% |
7.5% |
15.4% |
15.1% |
|
Projected Earnings Per Share (EPS) |
2,318 |
2,492 |
2,876 |
3,309 |
|
Target price (Based on 19.0X Fair PE ratio) |
- |
- |
- |
62,900 |
|
Potential upside (%) |
- |
- |
- |
10% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as of Sep 2022. *Fiscal year 1st April to 31st March. |
||||
Chart 10: Earnings forecast and price performance of Sensex Index
Table 4: Recommended Products
|
Unit Trust |
ETF |
|
|
India |
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