India Strategy - Rural India raises hope of recovery

Mr. Amnish Aggarwal, Director - Research at Prabhudas Lilladher

Indian economy is showing signs of fatigue given high inflation, Russia Ukraine war and rising crude prices. While Russia Ukraine war will increase inflation, there could be silver lining for rural India given 1) Rs500-600bn additional profits from rabi crop in Wheat, Mustard etc. and 2) likely gains of Rs1000-1500bn for dairy farming sector. We believe bottom end of the pyramid has been protected from inflation significantly by PM Garib Kalyan Yojana (Free Rice/wheat/pulses/ edible oil etc.) will protect downside. Normal monsoon and weak 4th covid wave will increase consumer confidence and boost rural demand.

We believe structurally story is intact led by 1) IT services with strong global demand, record hiring and salary hikes 2) expected gains from China+1 supply chain realignment 3) rising visibility of private sector capex 4) PLI schemes exceeding Rs2000bn over coming 3-4 years and 5) huge Govt led Infra capex amounting to USD1400bn although some delay due to inflation looks likely.

India seems well placed to fight against XE variant of Omicron given that we have administered at least one vaccination doze to ~1bn people and 2 dozes to 840mn people, we would keenly watch out for trend over the next couple of months as a weak or no 4th wave will boost sentiment in current tough environment. We remain cautious in near term with full year returns in mid-single digits in the base case. We are removing Hindalco and adding Fortis Hospitals in high conviction picks.

NIFTY target at 19979: FY22 NIFTY earnings estimate have seen a cut of 3.9% while FY23 and FY24 have seen a cut of 3.7% and 3.9% implying EPS growth of 27/17/ 14.2% for FY22/23/24. Consensus estimates have seen a cut of 4.7/2.7/2.5%. PLE are lower than consensus by 0.2/1.2% for FY23/24 respectively.

Base case: we value NIFTY at last 10-year average PE of 20.8x on FY24 EPS of Rs888, and arrive at April 23 NIFTY target of 18470 (18441 earlier based on 20.6x Dec23 NIFTY EPS of Rs895).

Bull Case: We value nifty at 10% premium to 10-year average PE and arrive at April23 target of 20317 (20285 earlier).

Bear Case - we value NIFTY at 10% discount to 10-year average and arrive at a target of 16623.Mixed Signals, although long term outlook Intact.

Source : Equity Bulls

Keywords

IndiaStrategy PrabhudasLilladher Economy HighInflation