CLSA India view: Stereovisual | Sees Nifty at 13,500-13,700; says ICICI Bank, Axis Bank, HDFC Bank are stocks to buy

A fundamental and technical view of India’s markets:

In its report, CLSA views India through fundamental and technical lenses to analyse the market and select stocks. CLSA’s technical Nifty view suggests upside could extend to the 13,500-13,700 area if the index can breach the meaningful 12,470 resistance. This is roughly in line with our fundamental view of a single-digit percentage return over the next 12 months. The crossover between our positive technical and fundamental BUY ideas includes ICICI Bank, Axis Bank, HDFC Bank, Dr Reddy’s, Infosys and HCL Tech. This partly aligns with our thesis of rotation into domestic-economy stocks such as financials, which have lagged in 2020 as a result of Covid and lockdown worries. CLSA’s common negative ground highlights Titan, ONGC, Maruti and Lupin.
Is the Nifty heading to 13,500?

From a technical perspective, the 12,118-12,470 zone has acted as key resistance in the last 12 months. The recent rally that tested this resistance zone unfortunately occurred with slowing upside momentum. This non-confirmation leads us to believe that it will be hard to break through 12,470. However, if this level is crossed on a closing basis, the next upside objective is 13,500-13,723, or about a 12% return from current levels. Despite expected volatility around the 12,118-12,470 zone in the coming weeks, we would view any corrections/pullbacks as opportunities. Support levels to watch for adding long positions include the 50-day MA at 11,516 and the 200-day MA, which coincides with 2019 lows at 10,646-10,672.

Nifty’s 12-month total return may be sub 10%:

From a fundamental standpoint, many significant peaks on the Nifty have been made at about 18.5-19.5x PE in the past 15 years and empirical evidence for investing above 18x PE has not been encouraging. With the Nifty already at 18 .6x FY22 PE, the 12-month total return may be capped at sub-10% unless economic normalisation over the next few months drives a faster-than-expected recovery and surprise EPS upgrades.

CLSA’s top positive ideas:

The mutual positive ideas emerging from our technical and fundamental analysis are ICICI Bank, Axis Bank, HDFC Bank, Dr Reddy’s, Infosys and HCL Tech. Our fundamental view argues for a rotation into Covid-impacted sectors as economic normalisation gathers pace through 2021 and CLSA see laggards from domestic economy sectors such as banking as the chief beneficiaries of such a move.

Names to avoid:

CLSA’s mutual negative ideas are Titan, ONGC, Maruti Suzuki and Lupin. Maruti Suzuki and ONGC are among CLSA’s fundamental analysts’ top non-consensus SELL ideas.
Nifty fundamentals:

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The Nifty’s 50% rally from 2020 March lows has pulled it close to it's all time high from January 2020. Global central bank stimulus has made markets treat the pandemic linked hit as largely a one off and driven this sharp V-shaped advance, which lifted the Nifty to an all-time 12-month forward PE high. While it can be argued that this PE is based on lockdown impacted FY21 earnings, CLSA noted that even on normalised FY22 EPS, the Nifty is trading at 18.6x PE. Historically, many significant peaks on the Nifty in the last 15 years have been in the 18.5-19.5x PE range. In addition, empirical evidence of investing above 18x PE has not been encouraging. Unless economic normalisation over the next few months drives a faster than expected recovery and surprise EPS upgrades, the 12 month total return on the Nifty may end up being less than 10% from current levels.