Macquarie suddenly turned cautious on India citing stretched valuations and risk of earnings downgrade from a one-year perspective even as it remains constructive on the long-term prospects. Macquarie said the consensus builds in an aggressive earnings recovery and on these high estimates, India’s two-year forward PE is near all-time highs and a premium to Emerging Markets. Macquarie also said even amid ongoing elevated inflation risk, consensus still assumes an aggregate of 300 bps of margin expansion into FY23 and sees earnings downgrades to work through in the coming quarter.
Before Macquarie, Goldman Sachs had downgraded Indian equities by one notch to ‘market weight’ on Saturday, citing less favorable risk-reward: “We believe the risk-reward for Indian equities is less favorable at current levels. The expected strong cyclical and profit recovery next year is well priced at current peak valuations, while the market faces risks from emerging macro pressures such as higher oil prices and the tightening of monetary policy at home and in the United States—-We think Indian markets could consolidate over the next 3-6 months and underperform the broader region—we expect a robust pipeline of initial public offerings next year that could divert funds from the secondary market.
CLSA also called for ‘book profits’ (long unwinding) on India amid higher energy prices, margin pressure, strong INR (negative for export-heavy Nifty earnings), withdrawal of RBI monetary stimulus, rich valuations (high PE), AND high probability of earnings disappointment.
On Monday, India’s Dalal Street opened in an upbeat mood following Wall Street cues. The Indian market was also boosted by upbeat car sales data for October. The SIAM data shows total passenger vehicles sales in India surged +41.4%sequentially (m/m)to 226,353 units in October. It was the first increase in passenger sales since June, boosted by demand ahead of the festive season. Three-wheeler sales were 31,774 units, while Two-wheeler sales were 15,41,621 units in October. Overall, October vehicle sales data was mixed but were in line with pre-COVID levels.
Commenting on the Oct’21 sales data, SIAM said: “The Passenger Vehicles sales in October 2021 were down by (-) 27.15% and Two-Wheelers were down by (-) 24.94% compared to October 2020. Though the numbers of Three-Wheelers in October 2021 sold were more than the previous year, it is still less than half of what was sold in October 2019. Manufacturers were banking on the festive season to recover from the severe drop in sales they have faced in the early part of the financial year 2021-22. However, shortage of semiconductors and steep hike in raw material cost has been a major spoilsport for the Industry”.
But Nifty slips after data shows that India’s WPI (PPI) jumped +12.54% in October from +10.66% in September, higher than the market expectations of +10.9%. The sequential (m/m) WPI rate was +2.28% in October.
The growing divergence between WPI and CPI indicates margin pressure for producers, negative for earnings. On the other hand, if producers can hike prices, it will cause more inflation, negative for the economy. Thus it may be a catch-22 position for India.
Technically, whatever may be the narrative; Nifty Future now needs to sustain over 18100-175 for 18350-405-550-675; otherwise, sustaining below 18075-17975, it will again fall to 17600-17225-17000 and 16875 in the coming days.