Nifty is trading at an attractive valuation on a relative basis. At current valuation multiple of 18.6 times, JM Financial see limited downside risk for the index. 
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Nifty is trading at an attractive valuation on a relative basis. At current valuation multiple of 18.6 times, JM Financial see limited downside risk for the index. Five Nifty companies namely Reliance Industries (RIL), Tata Motors Ltd, State Bank of India, BPCL and Axis Bank contributed 96 per cent of the incremental year-on-year (YoY) accretion in March quarter Nifty earnings. In one goes by consensus estimates, all five of these stocks have 'Buy' tags, with price targets suggesting upside potential of up to 23 per cent.
As FY23 concludes, Nifty EPS for the financial year fell 0.6 per cent to Rs 807 against an estimate of Rs 812 earlier, largely due to notable downgrades in ONGC, Coal India, and BPCL. The EPS estimates for FY24 also saw a cut of 0.6 per cent in EPS at Rs 972 against previous EPS estimate of Rs 978 due to downgrades in ONGC, BPCL and Infosys, Motilal Oswal Securities said.
"Earnings performances of both MOFSL Universe and Nifty were lopsided in 4QFY23 and led by a few heavyweights only. Five companies within MOFSL Universe (SBI, Tata Motors, BPCL, IOC and Reliance Industries) contributed 83 per cent of the incremental YoY accretion in earnings. Similarly, within Nifty, five companies (SBI, Tata Motors, BPCL, Reliance Industries, and Axis Bank) contributed 96 per cent of the incremental YoY accretion in earnings," the brokerage said.
In the case of Reliance Industries, the average target price for the stock stood at Rs 2,889, as per data available with Trendlyne, suggesting a 17 per cent potential upside. For SBI, the average price target of Rs 716 suggests a potential 23 per cent upside. Axis Bank's target stands at Rs 1,106, which hints at a possible 21 per cent upside. Tata Motors' average target price at Rs 594 suggests a 13 per cent upside potential. BPCL's average target price at Rs 412 also suggests a 13 per cent potential upside over the prevailing price.
Net-net, Nifty ended FY23 with a 11 per cent EPS growth on a high base of 34 per cent growth in FY22.
Earnings though remain lopsided with BFSI driving almost entire incremental earnings in FY23, Motilal Oswal said.
What's next?
Ambit Capital said EPS estimates in FY21-23 were resilient but trend continuation in FY24 looks difficult. Earnings trajectory will likely change from FY24, with BFSI contribution to incremental EPS growth tapering to 43 per cent.
"Our house view suggests IT, metals & O&G (Reliance Industries) contribute 20 per cent of incremental EPS growth & are at risk. While banks' EPS trajectory remains robust, risks to “Tech earnings” remain with expectation of revenue growth normalization to pre-Covid period. Delay in China recovery can hit Reliance & Metal earnings."
Ambit Capital said that its analysis suggests, even in FY21-22 year when aggregate headline earnings were met, “earnings delivery” breadth remained poor. "It’s global cyclicals earnings upgrades which delivered earnings in FY21/22. We don’t see material upgrades, additionally yield softening can put even bank NIMs at risk," it said.
Limited downside risk
In terms of stock market, the domestic benchmark is trading at an attractive valuation on a relative basis, which reflected in positive FII flows for the third month in a row, JM Financial said .
Nifty’s 1-year forward multiples have moderated from 2 Standard deviation (STD) to even lower than 1 STD from its long-term mean. At current valuation multiple of 18.6 times, JM Financial see limited downside risk for Nifty.
"However, we expect earnings to grow at a more realistic rate of 13 per cent-15 per cent in FY24. We are cognisant of the risk of adverse weather conditions, which could disrupt the demand environment, especially the rural economy," it said.
With healthy macros, range-bound oil prices, robust fiscal balance sheet and moderating inflation, the backdrop for the market is quite optimistic, said Motilal Oswal Securities.
“We maintain our OW stance on Financials, Capex, Autos and Consumption. We are Neutral on IT and Healthcare while we have UW stance on Metals, Energy and Utilities in our model portfolio," the brokerage said.
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