India's strong earnings are bolstering its position, according to Citi Research, which has upgraded the country to 'overweight' in its emerging market allocation. Meanwhile, despite the recent rally in the world's second-largest economy, Citi Research downgraded China to 'neutral' due to the weakening fundamentals.
"The emerging markets country strategy favours markets with inflecting earnings and strong earnings per share momentum," Citi Research said in a May 10 note.
India's real GDP growth is expected to be 6.8% year-on-year in FY25E, compared to 7.6% YoY in FY24E, according to Citi economists. Headline inflation is estimated to average 4.5% year-on-year in FY25E, with food inflation being a key upside risk to watch.
"Continue to expect the RBI's stance change in June and the first rate cut in October (CY24 cumulative rate cut of 50 basis points), with the balance of risks tilted towards a more protracted rate-cutting cycle," the note said.
Valuations, currently standing at 20 times one-year forward earnings, are more than one standard deviation above the long-term average, both in absolute terms and relative to emerging markets. However, the trajectory of earnings revisions remains relatively stable and is trending better than the long-term average.
Market View And Key Country Themes
Consumption trends are likely to persist in a "k-shaped" manner. Capex activity is under scrutiny, with elections being a significant factor to watch, Citi said. While there's notable momentum in public capex, private capex is gradually improving, it said.
Citi expects some moderation in credit growth, with a focus on trends in unsecured lending. Flows remain robust, although block and bulk deals have absorbed a significant portion of FII/DII inflows through CY23/CYTD24.
Citigroup's key overweight sectors include PSU utilities and defence, industrials, and banks/insurance, while key underweight sectors include consumer discretionary, information technology services, and metals.
The overall Nifty target for March 2025 stands at 23,900, indicating approximately 7% upside potential, the note said.
Focus On Fundamentals
Consensus estimates imply FY24-26E earnings CAGR of 13%/14%. Earnings revision trajectory broadly stable and trending better than LTA. "For 4QFY24E, we expect Nifty/Citi Universe earnings growth at 8%/7% YoY. Expect strong YoY growth in Autos, Energy, Pharma and Utilities, while Banks, IT, Industrials, Materials and Staples expected to be subdued", the note said.
Markets will likely focus on consumption trends (rural and urban), bank net interest margins/asset quality trends. Elections continue to be a key investor focus, Citi Research said.
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