Nifty may touch 13,640 by December 2021: Nomura

Nomura also pointed out that the September quarter earnings have beaten expectations.

Global brokerage firm Nomura is of the view that Nifty may hit the level of 13,640 by December 2021.

Nomura is of the view that the improvement in sentiment around the pandemic and improving high-frequency growth indicators and corporate earnings as the economy opens up could lead to market overlooking potential growth concerns that can emerge over time.

"Factoring in 4-5 percent risk to FY22/23 consensus earnings estimates and using 19 times on December-22 earnings, we arrive at December-21 Nifty target of 13,640, implying upside of 7 percent from the current levels. Upside risk to our target multiple in the near-term remains, on the back of strong capital flows," said Nomura in a note on November 12.

Nomura thinks We think capital flows resulting from improved risk sentiment will drive stocks in the near term.

The foreign brokerage firm also highlighted that the market sentiment is high due to positive reports about the coronavirus vaccine.

"News on the vaccine front has been positive over the past few days. Pfizer and RDIF (more relevant for India) have announced that their vaccines under development have demonstrated the efficacy of over 90 percent, based on interim Phase III results. This has raised hopes of the COVID-19 pandemic being contained, if not eradicated, and normalcy gradually returning to people’s lives," said Nomura.

Nomura added that the development of vaccines furthers the objective of normalisation, as it holds out the prospect of preventing infection, limiting the spread and reducing infection severity.

The development is positive for equities, Nomura said, as it improves risk sentiment against the backdrop of strong liquidity and sustained capital flows.

Nomura also pointed out that the September quarter earnings have beaten expectations.

"The Q2 earnings season has provided stability to FY21/22 earnings expectations. Post the spread of the pandemic and economic lockdowns, consensus FY21/22 earnings for Nifty were revised down by 27 percent/15 percent in Q1FY21; however, forecasts seem to have found a near-term bottom, and since Q1FY21-end, earnings estimates have been raised by 3.5 percent/4 percent for FY21/22," said Nomura.

"Consensus is now factoring in a 20 percent earnings CAGR over FY20-23, compared to a 7 percent CAGR over FY15-19. We think expectations for medium-term earnings growth are high and are premised on a strong growth revival, lower costs (including multiyear-low credit costs for banks)," Nomura added.

The foreign brokerage firm, however, pointed out that there are potential risks to current earnings estimates, mainly a slower-than-expected revival in economic growth and the adverse impact of a rise in commodity prices.

"Currently, based on bottom-up analysis, we are factoring in 4-5 percent risk to current consensus estimates for FY22/FY23," said the brokerage.

Nomura has increased weight on banks and financials and is now overweight on financials.

"In our model portfolio, we raise the weight on financials, as we expect their valuations could expand on the expectation of improving growth rates. We increase our weight on banks (increase weight in ICICI Bank, Axis Bank, add State Bank of India and Max Financial)," said Nomura.

On the other hand, Nomura has reduced weight on IT and pharma.

"We have reduced our weight on IT and pharma, but continue to remain overweight on these sectors, as we expect multiples to expand as earnings visibility improves," said Nomura.

"We add Sun Pharma. Our top picks are ICICI Bank, Axis Bank, HCL Tech, Mahindra & Mahindra and Sun Pharma (all buy-rated)," Nomura said.

Disclaimer: The above report is compiled from information available on public platforms. SD Soutions advises users to check with certified experts before taking any investment decisions.