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updated on 8 Mar 2017
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Goldman Sachs bets big on India, sees new highs in markets
The Goldman Sachs Group, Inc. is an American multinational finance company that engages in global investment banking, investment management, securities and other financial services, primarily with institutional clients.
Goldman Sachs, which maintains an ‘overweight’ stance on India, expects the Nifty50 to climb Mount 9,000 by the end of 2017 and hit fresh record highs of 10,200 by the end of 2018.
Since the start of the year, earnings sentiment has started to show signs of improvement led by analysts’ upgrades in tech, materials and industrials, the global investment bank said in a note.
Commodity cyclicals such as metals and mining, energy and select NBFCs/private banks such as Bajaj Finance and Yes Bank have seen earnings upgrades. Industrials such as Voltas, Adani Ports & urban consumers such as Titan and Maruti have also seen EPS upgrades on a year-to-date (YTD) basis.
Historically, buying stocks with positive earnings per share (EPS) revisions compared with negative revisions has performed well (15 per cent CAGR since 2014) given persistence in analyst revisions, Goldman Sachs said in its note.
The global investment bank highlights ‘buy’ or ‘neutral’ ratings on stocks that have seen the largest EPS upgrades year-to-date. The buy-rated stocks include Power Grid, Adani Ports, Titan, Yes Bank, Maruti Suzuki and Reliance Industries
The valuations are in line with historic averages. The MSCI India index trades at 17.2 times next 12-month (NTM) P/E (0.7 standard deviation above mean since 2004), which is 29 per cent PE premium compared with MXAPJ (in line with 23% average premium), and 3.2 times last 12-month (LTM) P/B.
Last week, Morgan Stanley lifted its base case scenario for the Sensex by 10 per cent to 33,000 citing a favourable cycle for mergers and acquisitions (M&As) that could lead to strong demand for stocks and potential overshoot in valuations.
The bull case target for the Sensex stands at 39,000 and the bear case target at 24,000.
Net demand for Indian equities is rising rapidly, which implies potential for a valuation overshoot. Domestic investors are already significant buyers of Indian equities and corporate buying is adding to this demand, they noted.
The global investment bank has also raised its earnings growth outlook. Morgan Stanley’s FY2019 earnings growth expectation for the Sensex has gone up from 15 per cent to 24 per cent, as they have embedded higher margins for corporate India going into an upcycle.
Morgan Stanley’s broad market earnings CAGR for the next two years stands at 17 per cent. It has also raised margin forecast for BSE Sensex from 19 per cent to 20 per cent.
Valuations look reasonable versus history, emerging markets and bonds. Rising demand for equities from domestic households and potential M&A activity can take the multiples higher in the coming months.