BofA Securities has cut the Nifty index target to 16,000 from 17,000 though it remains "overweight" on Indian staples due to rural turnaround.
"We see flattish market returns from current levels as we cut our base case Nifty target to 16K (17K earlier) on faster than earlier expected tightening: a) front-loading rate hikes in the US with 50bp hikes in June & July likely to follow the 50bp hike in May; b) inflation beats (BofA CPI of 6.8 per cent YoY in FY23 vs RBI's 5. 7 per cent) and rate shock (recent off-cycle 40bps hike) in India," it said in a report.
"Any easing of currently volatile crude prices, turnaround in FII flows & bottoming of INR could be an upside risk in our view, while global Inflation prints coming ahead of estimates & resulting in faster than anticipated rate hikes is the key downside risk. In this -ve scenario, we see Nifty's valuation multiple shrinking to its LTA (long-term average) of 15.8x, resulting in index at 13.7K which implies 15 per cent downside from current levels," the report added.
Rural rebound
BofA Securities sees a likely turnaround of currently muted rural sentiment in 1-2 quarters. "Our analysis suggests robust Rabi production, normal monsoons likely driving good Kharif yields, coupled with elevated agriculture prices (above MSP in most cases) and government subsidies curtailing cost pressures, could mean 10-12 per cent YoY rise in net farm incomes".
Further, front loading of infrastructure spends could also boost non-agriculture incomes, with wages also stabilising, it said adding that "We see Staples (raise view to overweight), select Autos & NBFCs segments & Cement as major sectors exposed to the theme".
Key beneficiaries
UltraTech Cement (pan India diversity, strong capacity additions) & M&M Financial Services (improving asset quality, focus on rural affluent and inexpensive valuations) are BofA analysts' key Buys in this space.
"We reiterate marginal overweight skew on Autos...Key beneficiaries: M&M (Buy) - auto earnings ramp up & tractor bottoming key; Hero MotoCorp (Neutral) - expect stock to do well near term given favorable valuation, positive rural (50 per cent of mix), better placed on supply side (vs. peers) & e-scooter launch (July 1); and Escorts (Neutral) given valuation seems to price in any likely gains.