InCred sees Nifty FY24 target at 21,103; suggests booking profits in infra stocks

After reclaiming the 20,000 mark in the previous session (November 29), the Nifty was trading in the red on Thursday (November 30) on the back of weak global cues as well as profit booking.

Despite today's decline, the Nifty was able to retain its 20,000 mark in today's deals. In a recent strategy note, brokerage house InCred Equities said it sees FY24 Nifty target at 21,103 and maintained an ‘overweight’ stance.

"We feel the government policy risk from the assembly/general elections, FII selling, and external volatility may lead to a continuation of the consolidation phase in the short term. However, due to the valuation comfort improving with the forward P/E easing to below the 10-year mean level and sustained EPS upgrade momentum, we maintain our Nifty-50 index target of 21,103 and Overweight stance. Key downside risks are any change in the government policy, election results impact, and external bond & equity market volatility," said the brokerage.

InCred expects high volatility in the Nifty 50 index to continue, considering the wide swing in macroeconomic variables globally influencing the estimates/sentiment. For its base case Nifty target, the brokerage assumes GDP growth of over 6 percent, Brent crude oil prices below 120/bbl, inflation below 6 percent, a repo rate hike of less than 50 bps, and a normal monsoon.

It also has a bull case scenario target of 23,191 for Nifty and a bear case scenario target of 18,553.

In the bull case, it assumes GDP growth of 7 percent, Brent crude oil prices less than $105/bbl, inflation below 5 percent, repo rate hike of less than 50 bps, and above normal monsoon.

Meanwhile, in the bear case scenario, it assumes GDP growth of less than 6 percent, Brent crude oil prices over 125/bbl, inflation over 7 percent, repo rate hike of over 75 bps, and below normal monsoon.

"We maintain our Nifty-50 index target of 21,103, by keeping our base-case, bull case, and bear-case Nifty P/E targets at 20x,18x, and 16x, respectively. We maintain the probability ratios at 50 percent for base-case, 30 percent for bull-case, and 20 percent for bear-case scenarios," it noted.

Largcaps vs midcaps

The brokerage also noted that the Nifty 50 index has been range-bound, at +/-2 percent in the recent three months.

However, mid-cap/ small-cap indices have seen a sharp rise of 9/16 percent, respectively, in the last three months. The large outperformance is driven by a P/E rerating of 20 percent vs the EPS upgrade outperformance of less than 100 bps vs Nifty50 witnessed in the last three months. The rich P/E valuation of the mid-cap index, at a 20 percent premium to the Nifty 50 index, is a cause of concern, stated the brokerage. It prefers largecaps over midcaps.

Investment theme

The brokerage continues to like housing investment theme, with the festive season demand likely to touch its new peak. However, considering the order inflow slowdown in recent months and the assembly elections-led uncertainty in H2FY24F, it shed its infrastructure investment theme and recommended booking profits, after a 20.8 percent return from the Nifty Infrastructure index in the last six months.

"With a sharp 21 percent upside seen in the Nifty infrastructure index in six months, easing order book trend in recent months, and the assembly/general election headwinds in India ahead of a seasonally strong H2, we recommend booking profit in the infrastructure capex-led theme stocks. Making use of the recent stock price correction, we introduce in our high-conviction list stocks such as Cyient DLM, Data Patterns, SBI & Tech Mahindra. We have removed Ultratech Cement & Dalmia Bharat for the poor risk-reward ratio at their current prices," it recommended.

High-conviction stocks’ performance and recent changes

The recent performance of InCred's high-conviction stocks, since the start of the series in Sep 2022, is given below:

Big outperformers to Nifty: KEI Ind max (ADD), Spandana Sphoorty Financial (ADD), Bharat Electronics (ADD) and Ashok Leyland (ADD).

Underperformers to Nifty: HDFC Bank (ADD), Clean Science and Technology (REDUCE) and Camlin Fine (ADD).

Additions to the list: Cyient DLM (ADD) is a beneficiary of rising defence spending by the USA and Israel. Data Patterns (ADD) for the benefits of rising in-house product development and annuity-based exports. Tech Mahindra's (ADD) stock correction provides an opportunity to play on its leadership change to drive new business wins and profit margin normalisation vs industry peers.

Deletions from the list: UltraTech Cement (ADD) and Dalmia Bharat (ADD) as these stocks have significantly outperformed the broader index.

September 2023 quarter results

The Sep 2023 quarter EPS recorded a good 19 percent YoY growth but missed the Bloomberg consensus estimate by 4 percent, as it witnessed a 4 percent QoQ dip. Adjusted for one-offs, the beat is just 2 percent, driven by the oil & gas, banking, capital goods and automobile sectors. Improvement in the pharma sector’s EBITDA growth is encouraging, it added.

The EBITDA margin QoQ expansion trend was sustained, aided by the festive season inventory build-up benefit for the consumer segment. The Nifty 50 index EPS upgrade trend sustained (0.5 percent) in the last two months, informed InCred.

Sector-wise rating and stock ideas

While the Nifty 50 index has been in a consolidation phase in recent months, the continued outperformance by mid-cap and small-cap stocks came as a surprise. The realty index momentum, aided by the strong festive season sales, is on the expected lines. The outperformance of IT and healthcare indices in recent months came as a surprise, with the worst likely to have been factored in their poor results. The prolonged underperformance of the financial services index disappoints, noted the brokerage.

The trend of downgrades overpowering the upgrades continued for its coverage universe in recent months as well. However, the list of upgrades has improved, aided by good results and valuation corrections. It has upgraded Century Plyboards, Cipla, Dr.Reddy's Laboratories, Ipca Labs, Kajaria Ceramics, Marico and Zydus Lifesciences. Meanwhile, it downgraded Divi's Labs, IKIO Lighting, Mahindra & Mahindra, Metropolis Healthcare, Mphasis, SBI Cards, Supreme Industries and Timken.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.