Why target prices for stocks are going through the roof

The benchmark indices have rallied 28 per cent this year, while the broader market has outperformed

Brokerages are increasingly revising their one-year price targets for Indian stocks, even as this year’s rally has been driven by re-rating.

In the past three months, all the Sensex companies, except ITC and Yes Bank, have seen an upward revision in price targets.

The broader market, too, has witnessed a similar trend, with 330 of the BSE 500 companies seeing their 12-month target price being moved upwards.

The revision in targets is in anticipation of growth revival and the start of a new earnings cycle.

The benchmark indices have rallied 28 per cent this year, while the broader market has outperformed.

This year’s stock rally has been driven by valuation expansion in the absence of earnings growth. However, the recent revisions factor in ambitious earnings upside.

The Street is forecasting a 20 per cent compounded earnings growth for the next two financial years.

In a lot of cases, the targets have been increased by more than 30 per cent.

Also, most brokerages expect the benchmark indices to deliver high double-digit returns.

“We believe that the market may positively surprise with its potential jump in earnings trajectory.

"The outlook for the next two years is backed by multiple tailwinds. India seems to be returning to high-growth phase amid reforms such as the GST (Goods and Services Tax),” said Mahantesh Sabarad, head-retail research, SBI Cap Securities.

According to Sabarad, the tailwinds include “GST-led consumption boost, cyclical earnings revival, favourable commodity prices and low cost of debt”.

His brokerage gave a target of 12,000 for the Nifty by next year, a 15 per cent upside from the current level.

The bottom line of India Inc has remained almost stagnant for the past three years.

The stress was acute in the past four quarters as some of the recent reforms like the GST disrupted the earnings cycle.

However, the one-time impact of these reforms seems to be fading, and analysts are predicting a strong rebound in the corporate profits from the December quarter onwards.

“The performance of the Indian market will depend on possible strong earnings growth due to ‘normalisation’ of operating conditions in several sectors, favourable global commodity cycles and moderate domestic economic recovery that will support consumption.

"A strong earnings growth (minimum 15 per cent) for the broad market will be critical for the market to deliver positive returns in 2018.

"However, higher inflation, crude oil prices and global macroeconomic conditions, including a possible slowdown in China, could be key headwinds for this earnings recovery,” said Sanjeev Prasad, head of research, Kotak Institutional Equities.

While the fundamentals seem to be improving at the macro level, the gush of liquidity amid strong inflows into mutual funds is also helping markets.

Mutual funds have been key market movers this year as they purchased equities to the tune of more than Rs 1 lakh crore.

Systematic investment funds continue to attract good inflows from the retail investors.

“Financialisation of savings post demonetisation is also helping markets attract fresh inflows as their investment is outpacing the FIIs inflows,” said Sabarad.

Photograph: Danish Siddiqui/Reuters