The 2021 calendar year will be marked with hopes of an early roll-out of the COVID-19 vaccine, normalisation of activities, and unperturbed growth recovery. We expect CY21/FY22 to be a better year with a likely strong recovery in both the economy and earnings.
There will be a remarkable shift in nominal GDP growth from (-) 6.1 per cent in FY21E to 14 per cent in FY22E which will help corporates to report healthy revenue and earnings growth. This year's high base effect will keep inflation on a gradual glide path towards 4.8 per cent in FY22.
Average inflation in FY22E is expected to be 4.7 per cent versus 6.4 per cent in FY21E. Fiscal consolidation is unlikely to be sharp with gross borrowing only marginally lower than FY21E. However, due to the sharp rise in nominal GDP growth, expect the Centre's gross fiscal deficit to GDP to come down to 5.5 per cent in FY22E against 7.1 per cent in FY21E. The 10-year G-Sec yield is expected to inch higher towards 6.25-6.5 per cent in 2HFY22.
The earnings of the Nifty-50 index are likely to rise by 11 per cent in FY21E, by 28 per cent in FY22E, and 19 per cent in FY23E. FY21 estimates are not very relevant given the impact of the coronavirus pandemic on the domestic and global economy, which will result in a sharp decline in both volumes and profitability in many sectors.
A sharp recovery is expected in FY22E net profit coming from automobiles, banks, metals, and telecom sector. Our updated free float Earnings Per Share (EPS) for Nifty-50 stands at Rs 488 for FY21E, Rs 628 for FY22E, and Rs 746 for FY23E. It is interesting to note that the previous five years' earnings CAGR of Nifty-50 has been just 2.6 per cent (i.e. FY16-20). On the low base, Nifty-50 earnings CAGR for the period FY20-23E are likely to be around18 per cent.
With fresh stimulus coming from the Bank of Japan & European Central Bank and likely stimulus coming from the Fed early next year, FPI flows are expected to remain strong in the initial months of CY21. Overall, we expect FII flows to range between $15 and 20 billion in CY21 as compared to more than $22 billion received in this calendar year-to-date.
CY20 has favoured high growth and beta stocks. Most of the high growth and quality stocks are now 'priced to perfection' leaving scope for potential re-rating in value stocks. As we go into CY21 with a few vaccines coming in the market, it would be ideal to play the recovery theme for next year.
In this scenario, cyclical sectors and stocks could score over defensives in CY21. Returns in CY21 could be more broad-based as compared to the wide divergence seen in CY21. They could also be a function of earnings upgrades and the potential for any re-rating could be higher in the case of value stocks in CY21.
Markets are expected to behave differently in the first half and second half of CY21. Q3 earnings season could turn out to be strong due to healthy advance tax figures and also lead to some earnings upgrades. We can expect Nifty to go anywhere between the 14,000 & 15,000 range sometime in the first quarter of CY21.
Post budget and Q4 results season, markets are expected to go into some kind of consolidation phase and witness time correction. Moderation in monetary policy and rising yields scenario is expected in 2HCY21, which will lead to mean reversion of valuations towards 10/15-year averages.
Based on these theses, we have used the previous 15-year peak of 19x forward PE multiple to value the Nifty-50 to derive at our CY21 end target. Nifty-50 is likely to end CY21 somewhere around 13,500 and BSE Sensex to end at around 46,000.
(The author is executive vice president, head of fundamental research at Kotak Securities.)