BofA cuts Nifty year-end target to 17500 amid global slowdown, ballooning CAD & fiscal deficit concerns

BofA cuts Nifty year-end target to 17500 amid global slowdown, ballooning CAD & fiscal deficit concerns

BofA Securities has cut its Nifty target by 1,000 points and now expects the 50-share domestic benchmark index to trade at 17,500 points by the end of CY2022. The foreign brokerage has lowered its target amid major headwinds. According to BoFA Securities analysts, higher crude, slowing global growth along with depreciating currency could create a downward spiral of macro risks – ballooning current account deficit (CAD) and overshooting fiscal deficit (FD) in the near term. “We see 40bps upside risk to FY23’s budgeted fiscal deficit estimate of 6.4%. We see CAD too at 3% of GDP vs 2.5% threshold, driven by uncomfortably high trade deficit,” they said.  

If crude and currency risks play out, BoFA Securities expect the headwinds to deteriorate India’s macro. The American brokerage sees risks to capex upcycle thesis. Given this, it believes that further earnings cuts cannot be ruled out. “We cut our Nifty trading range to 16500-18500 (from 17000- 19500 earlier) and lower our base target to 17500 from 18500 earlier,” it said. BoFA’s estimates suggest 12% and 14% increase in Nifty and Sensex earnings respectively on an optically high base.EBITDA margin for Sensex companies is expected to contract 200 bps on-year on softer commodity costs. Overall, the brokerage expects earnings cuts to continue.

Spike in crude with further Opec+ production cuts and potential China revival post CCP elections could be key risks to the earnings according to the analysts. Higher crude price impacts the Indian economy majorly as 10% rise in crude oil price impacts CPI inflation by 23 bps. It could be larger at around 100 bps over 12-18 months, due to cost reset via higher transport costs, according to the brokerage report. BofA Global Research Economists expect CPI inflation to average at 6.8% on-year in FY23.

Higher crude prices also puts pressure on India’s CAD as US $10/bbl rise in crude pushes India’s CAD up by 27 bps. The brokerage sees upside risks to their FY23 CAD estimate of 3%, with oil assumed at $105/bbl. The risk of funding this elevated CAD is now rising, given India’s thinning FX reserves. Aside from CAD and CPI inflation, higher crude could also result in higher than budgeted fuel subsidy or foregone excise revenues if the government chooses to give relief to the consumers.

Currency risks from thinning forex, higher CAD & BoP

Rupee has been depreciating against the US dollar for the past few months. USDINR is already down 5.7% so far this year, and BofA pegs it at Rs 83 by FY23-end (-1.2%). India’s forex reserves have taken a hit as the strong dollar and adverse external factors reduced India’s forex kitty. According to the BoFA report, from its peak of US $640 billion in October, RBI’s forex reserves have fallen to US $534 billion, which implies an import cover of marginally above 8 months.

According to the international brokerage firm’s report, of the $110 billion fall, 67% was on devaluation of non-USD reserves and bond yields move, mostly in the last 5 months. “As FX reserve buffer is thinning, a sizable Balance of Payments (BoP) deficit is likely to exert pressure on INR. Global slowdown threatening export growth is a key risk to an already elevated trade deficit,” BoFA said.

Favor domestic cyclicals, defensives vs external facing sectors

Analysts continue to favor domestic cyclicals such as Financials, Industrials, and defensives including Utilities, Healthcare. They upgraded Staples as hedge towards volatile markets. BoFA continues to remain underweight on external facing IT, Materials and Energy. It upgraded cement to overweight (OW) on strong traction in real estate and continued execution momentum in Industrials. Meanwhile, it degraded autos to underweight (UW) on crude, currency headwinds and normalizing demand, and communication services on higher 5G capex, limited visibility on tariff hikes. It continues to remain underweight on Consumer Discretionary given steep valuations.

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