Brokerages like Ambit Capital trim returns expectations from stock market for next year

MUMBAI: Brokerages are toning down their returns expectations from the stock market for the next one year. The prospect of further slowdown in company earnings and pricey stock valuations have prompted a couple of brokerages to cut their targets for the benchmark indices.

Ambit Capital cut its Sensex target to 34,000 from 36,000 for 2015-16, while Macquarie Capital reduced its Nifty target to 9,600 from 9,940. So far, only two have trimmed their index targets, but other brokerages are likely to follow suit as an expected decline in profits will make it tougher for analysts to justify higher valuation forecasts.

"Markets are now factoring in a slower recovery on the ground, while earnings expectations have also been cut. Downside risks to the market are now limited to 3-4 per cent from the current levels," said Rakesh Arora, head of research at Macquarie. However, even with the revised target of Macquarie, investors can get 15 per cent in returns. The Nifty closed at 8,491 on Tuesday.

Investors are watching the fourth quarter results closely to assess the extent of the slowdown in companies’ earnings as the downturn continues.

"We have also cut back our GDP growth estimates from 7.9 per cent to 7.5 per cent for FY16, and our reckoning is that earnings estimates for the Sensex will continue to fall," said Saurabh Mukherjea, CEO-institutional equities, Ambit Capital. "We will have weak Q4 results and potentially Q1 as well."


The Sensex has gained about 27 per cent in past one year on expectations that corporate earnings would recover. But, a realisation that earnings and economic growth may not rebound in a hurry has sparked some profit booking. The Sensex has fallen close to 7 per cent, or 2,000 points, from its record high of 30,024, which the index hit earlier in March.
Even after the correction, local markets remain expensive compared to the peers. The Sensex is trading at 15.6 times estimated earnings against 10.8 times for the MSCI Emerging Market Index.

"Nifty would trade rangebound around the 8,500 mark, plus or minus 200 points, till September — that's the end of the monsoon season," said Mahantesh Sabarad- deputy head of research at SBI Cap Securities.

Brokerages have cut Nifty earnings estimates for 2015-16 by 4-5 per cent (excluding oil & gas). Now, they are building in subdued EPS growth assumptions of 10 per cent and 17 per cent for FY15 and FY16, respectively.

"In the forthcoming season we expect earnings to fare better than in the previous quarter, but we do not expect any recovery to happen before the September quarter," said Ridham Desai, managing director and head of research at Morgan Stanley India.