See limited upside for market from current levels, says Citi India

Surendra Goyal, head-India research; Manish Shukla, director-India banks, NBFCs and insurance; Raashi Chopra, director-metals, mining and cement; Jamshed Dadabhoy, director-consumer discretionary and staples of Citi India shared their views on the equity markets.

“On the market, our target for March of next year implies a limited upside from here. I think it is a combination of two-three things. If you look at from an absolute return perspective, the market is at more than one and a half standard deviation above what the long-term average is. So to that extent, valuations are pricing in a lot but on the other side, you have seen flows sustain, foreign flows have been coming because, after the election outcome, people are more confident about the political certainty etc, so foreign flows were good going into the elections and that momentum has continued. Domestic flow has been slower than last year but still a positive. So you have flows on the relative side if you look at the other EMs, obviously with all the trade are noise India looks relatively safer place to be in. So I think we are caught between the absolute valuations being high and relatively India looking okay but our view is given where valuations are and the fact that there are challenges, one cannot ignore the challenges that we are seeing either on financials or consumer, autos. So when you put it all together, it is difficult to be very constructive on the market. While we admit that relatively India looks okay but then the MSCI India premium today is almost 60 percent to MSCI EM and if you see the highest it ever has been is 70, the long-term average is 40, so there also we are well above the average and which is what makes us believe that absolute upsides from here are going to be limited,” said Goyal.

Speaking about ICICI Bank, Axis Bank and State Bank of India (SBI), Shukla said, “These are the banks where you have a fair bit of comfort on earnings momentum improving which in today’s market says something that you have a fair bit of earnings confidence. At this stage, most of us on the street are not building in any revival in growth. The delta in earnings for these banks is driven by credit cost in net interest margins (NIMs). So if after the government policies are announced and growth picks up, there would be an added leg for growth. Among banks, we like IndusInd Bank as the other alternative. Among transport financials, we cover Mahindra and Mahindra Financial Services (MMFSL) and Shriram Transport Finance Corporation. Our preference is Shriram Transport Finance Corporation over MMFSL, it is more a valuation call. We believe MMFSL is a bit more fairly valued as compared to Shriram Transport Finance Corporation.”