Nifty to hit 26,820 in 12 months, says Prabhudas Lilladher; removes HDFC Bank, ITC from top picks, adds IndusInd, IndiGo

Domestic brokerage house Prabhudas Lilladher has revised its Nifty target to reach 26,820 over the next 12 months in its latest India Strategy Report. This projects a 6 percent increase from Friday's closing. This revision reflects the firm's updated expectations for the Indian equity market, factoring in various economic and market conditions.

“PL Capital values Nifty at 15-year average PE (19x) with March 26 EPS of ₹1,411 and arrives at 12-month target of 26,820, revised higher from earlier target of 26,398. In a bull case scenario, PL Capital values Nifty at PE of 20.2x and arrives at a target of 28,564. In a bear case scenario, Nifty may trade at a 10 percent discount to a long-period average with a target of 24,407,” said the brokerage.

Currently, the Nifty is trading at 18.9 times its 1-year forward EPS, nearly in line with its 15-year average of 19 times. This suggests that while valuations are not overly stretched, the market is pricing in strong earnings growth and economic resilience, stated the brokerage.

Revised EPS Projections

In the report, PL has slightly downgraded Nifty's EPS projections by 0.3 percent for FY25 and 0.4 percent for FY26. Despite these revisions, they still anticipate a robust compound annual growth rate (CAGR) of 17.8 percent for Nifty's EPS over FY24-26, with expected EPS estimates of ₹1,247 for FY25 and ₹1,411 for FY26. The firm's EPS estimates align with the market consensus for FY25 but are 2 percent lower for FY26.

Market Resilience Amid Volatility

Since the release of PL's last India Strategy Report on July 11, 2024, Nifty has delivered a return of 1.6 percent, even as market volatility has risen due to deteriorating geopolitical conditions. The report highlights that Indian markets have remained resilient, largely supported by strong domestic institutional investor (DII) inflows, even as foreign institutional investor (FII) selling pressure has eased.

The firm also noted that market volatility has been driven by factors such as the Japanese carry trade and geopolitical uncertainty. However, strong DII inflows have continued to support the markets, offsetting the impact of FII outflows.

Sectoral Insights and Market Trends

The report indicates a mixed-demand environment. Still, there is optimism for a revival during the festival season, supported by favourable monsoon conditions, increased government infrastructure spending, and a potential revival in private capital expenditure. Additionally, it said that the increasing likelihood of an interest rate cut by the US Federal Reserve and overall inflation dropping below 4 percent raise hopes for a potential repo rate cut in India during the second half of FY25. 

The report also highlighted the narrowing return differential between large-cap and mid-cap indices over the past three months, with small caps continuing to outperform large caps by approximately 6 percent. It expects this convergence between large-cap and mid/small-cap returns to persist.

Shifting Focus to Defensive Sectors

With high valuations in some growth sectors, the brokerage anticipates a shift towards defensive sectors such as consumer goods, durables, building materials, IT services, pharmaceuticals, and telecom. While sectors like capital goods, infrastructure, logistics/ports, electronic manufacturing services (EMS), hospitals, tourism, auto, new energy, and e-commerce present attractive opportunities, the firm cautions investors to remain mindful of valuations.

Conviction Picks: Additions and Removals

Prabhudas Lilladher has made several changes to its high-conviction picks in light of recent market developments. The firm has removed HDFC Bank, ITC, Maruti Suzuki, Eris Lifesciences, and TCI Express from its list, citing factors such as recent rallies and slower growth projections.

In their place, the firm has added Bharti Airtel, IndusInd Bank, Interglobe Aviation, Lupin, Mahindra & Mahindra (M&M), BEML, and Lemon Tree Hotels as its new high-conviction picks.

Bharti Airtel: Bharti Airtel, with a subscriber base of 355 million and an average revenue per user (ARPU) of ₹211, continues to focus on quality customers, prepaid to postpaid conversion, rural expansion, and growth in B2B segments. The company is expected to benefit from recent tariff hikes in the prepaid segment and postpaid plans, providing tailwinds to its numbers in the second half of FY25. PL Capital estimates net subscriber additions of 13 million and 19 million in FY25 and FY26, respectively, with an ARPU of ₹230 and ₹268, noted the brokerage.

IndusInd Bank: According to PL, IndusInd Bank is expected to outpace the system with loan growth of 16-17 percent over FY24-26E, with net interest margins (NIMs) remaining among the best in class at 4.3-4.4 percent. Despite concerns over lower liability growth and buffer provisions, the bank’s attractive valuation at 1.35x FY26E adjusted book value (ABV) makes it a compelling pick.

Interglobe Aviation: Interglobe Aviation (IndiGo) is deepening its international reach with Airbus A350-900 orders and adding a new business class. Key factors to monitor include fuel prices, competitive intensity, and P&W engine issues. PL Capital maintains EBITDAR estimates for IndiGo, adjusting for higher fuel costs and expects a 16 percent revenue CAGR over FY24-26, said the brokerage.

Lupin: Lupin has seen a significant turnaround in profitability, with EBITDA doubling over FY23-24, driven by a better product mix, continued niche launches in the US, and cost optimisation measures. The firm expects margins to sustain, backed by a strong pipeline in the US, stated PL.

Mahindra & Mahindra: As per the brokerage, M&M is well-positioned to capitalise on the growing demand for utility vehicles (UVs), supported by new models and capacity expansions. The company projects an overall automotive volume growth of 12.6 percent CAGR from FY24-26E, with a PAT CAGR of 22.1 percent over the same period.

BEML: BEML is poised for long-term growth, driven by a significant tender pipeline in metro and defence projects. The company is expected to report a revenue/adj PAT CAGR of 18.8 percent and 37.6 percent, respectively, over FY24-26E, stated the brokerage.

Lemon Tree Hotels: Lemon Tree Hotels is expected to benefit from stronger retail demand and better pricing in the second half of FY25, following renovations and a strategic exit from the low-yield airline hotel business. The brokerage maintains a sales/EBITDA CAGR of 17/22 percent for FY24-26E and sees the recent stock drop as a buying opportunity.

Prabhudas Lilladher’s latest India Strategy report highlights the resilience of the Indian equity market amidst global volatility and economic uncertainties. With Nifty’s target set at 26,820, the firm remains optimistic about the market’s potential, supported by strong domestic inflows, sectoral shifts, and favourable economic conditions. The addition of new high-conviction picks reflects the firm’s strategic focus on sectors and companies poised for growth while mindful of valuations in a rapidly evolving market landscape.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.