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Bullish Trend Will Reassert Itself In India: Goldman Sachs

Despite near-term weakness persisting in equity markets in India due to stretched valuations, the bullish trend will reassert itself as corporate earnings recover, argues Goldman Sachs.

Sunil Koul and team at Goldman Sachs in their July 3, 2015 “India Weekly Kickstart” report offer a NIFTY 12-month target of 9400.

GS stay OW India

Striking a positive note, Koul and team at Goldman Sachs continue to believe the strategic case for India is one of the most positive in the region, considering ongoing progress in various reforms.

However, keeping in mind the near-term slow progress and soft 2014 earnings, the GS analysts have trimmed their 2015E EPS growth forecast to 11% from 13% and pegged a 12-month NIFTY index target of 9400, down from 9700 earlier:

Stay OW India

Koul and colleagues point out that continuing its positive momentum, NIFTY closed 1.2% higher and outperformed the broader region, with CNX FMCG (+3%) and Financials (+2%) led, while Infotech and Realty lagged (down 1%):

Price performance of India sector indices

The following charts capture MSCI India’s indices across size, style and sector:

MSCI indices

Focusing on valuations, Koul et al. point out FY 16 earnings sentiment remains negative with MSCI India currently trading at 17.3x 12-month forward P/E and 3.3x 12-month trailing book value:

Valuations - India

The following captures earnings sentiments and revisions for India:

Earnings sentiment and revisions

Koul and team note CMIE Capex June data for India continue to witness gradual improvement in new capex activity particularly in Transport and Power sectors.

Indian equities witnessed foreign outflows

Focusing on fund flows, the Goldman Sachs analysts point out that Indian equities witnessed foreign outflows of $1.0 billion and inflows of $3.2 billion from domestic institutions over the past two months. However, year-to-date, FIIs net bought $6.2 billion, while DIIs bought $4.2 billion in equities. Moreover, bonds have witnessed foreign inflows of $6.4 billion so far this year:

Fund flows - India

Sunil Koul and team note FIIs currently own $325 billion of Indian equities, with mutual funds, advisors and trusts currently owning nearly 60% of total foreign holdings:

FII ownership and holdings in India

The analysts note AEJ and EM focused mutual funds are still OW India by about 450 to 700 bps at the end of May:

AEJ and EM funds OW

The following table summarizes the analysts’ India conviction list:

Conviction List

Analyzing the monsoon aspect, which is critical for India, Koul and colleagues note cumulative rainfall received so far in India is 13% above normal with nearly 90% of country receiving normal or excess rains:

Monsoon monitor

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