The fair value of the Nifty over a 12-18 month period is 16300 (22x FY23E EPS): ICICI-Direct

Update 28th May 2021: According to Jefferies, Reliance (CMP Rs. 2095) has a base target of Rs 2,580 level & a bull case target of Rs 3,150 (59% gain). If this comes true, the target of 16800+ for the Nifty (CMP 15400) will be achieved.

Update 1st April 2021: Axis has maintained the Nifty December target at 17200 (see
Axis Top Picks for April 2021



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ICICI-Direct has issued a report stating that the current Nifty PE of 32.8x (based on FY20 EPS) and Trailing Twelve Months (TTM) PE of ~38.5x has been off late a central point of argument among investors with relation to whether the broader markets are highly euphoric and run ahead of fundamentals.

They have argued that comparing the PE multiples in isolation will not spell out the correct direction or assessment as to whether Nifty multiples are stretched or undervalued. For instance, looking at just TTM PE of 38.5x will definitely make one say about overvaluations but on the contrary this number does not give the correct picture as the TTM EPS so applied includes performance of Q1FY21 and Q2FY21 wherein earnings of corporate India were completely washed out thereby deflating the true earnings. Secondly, markets are forward looking which tries to discount the future earnings potential of companies.

They have dissected why TTM PE and forward PE of Nifty will shift to higher orbits based on the following:

- Nifty constituents have undergone major change in past decade and hence current and forward PE multiples have shifted to higher orbit. The weights of capital efficient sectors such as FMCG, Financials (private banks), IT and Pharma have increased from 29% in March 2009 to 70% in December 2020.

- Earnings visibility and consistency is preferred by markets and hence capital efficient sectors like FMCG, Financials, IT and Pharma, which command higher PE multiples, have been gaining higher weightages in the Nifty.

- Better performing business segments within existing companies is not captured by current PE multiples. Business models like L&T, SBI etc. have multiple business lines and hence SoTP (Sum of the parts) based valuations of these companies are not captured by the PE ratio alone.

- Bottom up P/E construct on expected performances signals shift in forward PE multiples of Nifty
Hence, in order to arrive at a fair value on the bottom up basis, we take a 10-15% discount to our weighted average PE of 26.2x in order to account for future earnings downgrades and any other unforeseen macro risks which might risk earnings to come at a target PE range of 22x-23.6x.

Consequently, ICICI-Direct has arrived at a fair value of 16300 on Nifty over a 12-18 month period (22x FY23E EPS).

It is worth recalling that other luminaries have also projected a similar target for the Nifty.

Axis Capital has opined that the Nifty is headed to 16,800 by December 2021. It has recommended 9 top-quality stocks for us to buy.

Jefferies, the influential foreign brokerage, has endorsed this stance and projected a target of 15,800 for the Nifty. They have also recommended 10 stocks.

Click here to download the ICICI-Direct research report