After an unexpected poll verdict on Tuesday, Emkay Global has cut Nifty's target to 22,000 from 24,000. As Prime Minister Narendra Modi's BJP failed to secure majority, Emkay has said that it expects nil returns for the next 12 months. However, it has ruled-out any extended bear market.
Emkay Global also noted that some structural reforms would be in the back burner now, however, it is unlikely for the economic direction to change for the next 2-3 years.
"This may result in some earnings downgrades in the near-to-mid-term. However, companies will ride out this short cycle given their strong balance sheets and cash flows. The major impact would be a derating, in our view," it said.
Emkay Global has also shifted its near-term preference to the large- and top-end of the midcap range from small and midcap space as it prefers stocks with strong earnings visibility, reasonable valuations, and low risk. In the perspective of 2-3 years, it retained its preference for Small and Mid caps, as it thinks the current cycle will continue to be investment over consumption and manufacturing over services.
Emkay's sectoral preference has also changed, in which industrials are underweight now due to rich valuations and weak sentiment. Real estate is downgraded as well.
"We upgrade FMCG, IT, and Healthcare to OW, largely on defensive positioning. FMCG is showing signs of a demand pickup and IT valuations give us some comfort. If the new government reacts to the election results with a demand stimulus, it would be an additional positive but not our base case," it said
The brokerage has also retained its overweight on durables, with a greater focus on OEMs over ancillaries. Its contrarian underweight on financials continues. It said is exiting all PSUs and companies with weak earnings structures.
Emkay has removed Zomato, Delhivery (valuations, weak earnings structure), Ambuja Cements (high valuations), ITC (budget risks), Motherson Sumi Wiring, and ONGC (exiting PSUs) from of its model portfolio.
Meanwhile it added, Hero MotoCorp, Maruti Suzuki, Hindustan Unilever, Nestlé (mass consumption theme), Infosys, Shree Cement (defensive, relatively low multiples) while it increased weight to Reliance to replace ONGC's.
Emkay Global is expecting the new government to form in the next 2-3 days and is closely watching the ministry allocation.
"The accommodation of key allies would be close tracked – the number of ministers inducted as well as the ministries they are given. The identities of senior ministers (Finance, Home, Defense, and External Affairs) would be another key monitorable. The NDA may publish a broad policy document once the cabinet is sworn in which would give us some perspective of the new government's policy imperatives. We would then move on to the Union Budget, expected in early Jul-2024," it said
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