It was a bloodbath on Dalal Street—with the Sensex and the Nifty falling by 2% to 58,465.89 and 17,416.55 levels respectively, as concerns around rising inflation, farm scheme rollback impact and cancellation of Reliance (RIL)-Aramco deal took centre-stage.
With index heavyweight RIL scrapping its 20% stake sale in the oil to the chemical unit to Saudi major Aramco, the stock ended 4.35% lower at ₹2,365.65, after hitting an intra-day low of ₹2,356 a share. While some analysts have slashed their price targets, others do not see any impact on the company. The repeal of the farm laws had an impact on the broader market as 2,479 shares declined. Also, concerns around inflation, despite a fall in crude prices, took their toll.
Though second quarter (Q2 FY22) Nifty-50 earnings have come above expectation primarily led by commodities with metals, oil & gas, logistics, retail, pharma and real estate doing well. Among Nifty-50, 21 companies beat analyst estimates while eight companies did not. Going ahead, analysts expect corporate earnings to double over FY20-24 levels of ₹464 in FY20 and ₹518 in FY21; to ₹706 in FY22; ₹839 in FY23; and ₹958 in FY24. “This expectation of earnings doubling in just four years (as against earlier low single-digit EPS growth) is likely to keep valuation elevated despite likely rate hike in 2022,” mentions a report by Antique Stock Broking. As a consequence, the brokerage expects Nifty 50 to hit 20,100 by March 2023, based on 21x FY24 EPS of ₹958.
The second-quarter earnings commentary by management indicates that the demand outlook remains despite price hikes. Although, the ability of companies to completely pass-through inflation costs is a concern, especially in the auto and FMCG sectors. However, foreign brokerage Jefferies believes corporate profit growth—which was lacklustre over the FY11-FY20 period growing by a paltry 0.4% CAGR—will improve with FY20-FY22 earnings growth of 51% CAGR.
But a whole host of other foreign brokerages—Goldman Sachs, Morgan Stanley, Nomura, and CLSA—believe despite the positives, India’s valuations are too expensive, given that the Indian stocks have in high double digits in CY21 compared with a 1% drop in the MSCI Emerging Market index. The worry around Fed tapering and the reversal of an easy monetary policy by the central bank are the other big worries.