Goldman Sachs Group expects Nifty to reach 20,500 – a 12% price upside from the current levels – by the end of 2023 led by mid-teen corporate earnings growth.

India continues to offer superior profit growth compared to the rest of the region, Goldman Sachs' India 2023 Equity Outlook report says.

While the earnings outlook remains challenging for many markets, the 15% expected CAGR profit growth (2023 and 2024) in India, is among the highest in the region and almost twice the 8% regional CAGR forecast, the report says.

The brokerage, however, adds that India's stock market remains the most expensive in Asia and when compared to other emerging markets currently.

"While India's macro/GDP growth and earnings outlook is better than the rest of the region in aggregate, we think the current market valuations are already pricing in India's superior earnings growth over the next couple of years," writes Sunil Koul, Asia Pacific Strategist, Goldman Sachs.

"As 2023 unfolds, we think Indian equities are less likely to outperform for the third successive year as China and other globally cyclical North Asian markets could perform better on China reopening catalysts and global recovery expectations in 2024," says Koul.

"While we remain bullish on India's long-term prospects, high starting valuations and these near-term cyclical considerations prompt a marketweight stance to start the year," he adds.

Indian equities experienced record selling by foreign portfolio investors (FPIs) during the first half of this year. Despite record selling by foreign institutional investors, Indian equities didn't correct much because of strong support from domestic buying. Domestic institutions including mutual funds have net bought $33 billion year-to-date, fully offsetting the $19 billion foreign selling.

FII ownership in BSE 200 stocks stands at a nine-year low of 21% (as of October 31, 2022) and overall foreign holdings stand at about 18% of India's listed exchange cap as of end-October 2022.

The brokerage remains overweight on banks as it expects earnings growth to remain resilient at about 20%, driven by high-teen loan growth and stable or higher margins next year due to ongoing repricing of loans for another few quarters.

This projection comes at a time when the Nifty Bank has rallied 20% this year and has outperformed the broader Nifty index by 14 percentage points on a year-to-date basis. The sector, however, remains 15% below its pre-Covid relative peak.

The brokerage stays underweight on non-banking financial companies (NBFCs) as their profitability is likely to come under pressure due to a sharper increase in borrowing costs, higher dependency on bank borrowings this cycle, and increasing competition across consumer lending among others.

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