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Macquarie turns cautious on India citing stretched valuations, sees earnings downgrade risk

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Macquarie's cautious commentary comes after a slew of downgrades and negative commentary by several other foreign brokerages such as Goldman Sachs, Morgan Stanley, Nomura and UBS. Macquarie has mentioned 7 stocks, including Reliance Industries, Tata Power, Eicher Motors and Axis Bank, under 'relative underweights' category and 8 stocks, including Bharti Airtel, Infosys, ICICI Bank, Asian Paints and TVS Motor, as 'alternative buys'.

Macquarie turns cautious on India citing stretched valuations, sees earnings downgrade risk
Macquarie is the latest to join the spate of foreign brokerage firms to turn cautious on India citing stretched valuations and risk of earnings downgrade from a one-year perspective even as it remains constructive on the long-term prospects.
Before Macquarie's cautious commentary, brokerages such as Goldman Sachs, Morgan Stanley, Nomura and UBS came up with their downgrades and negative commentaries.
For instance, Goldman Sachs had downgraded Indian equities by one notch to 'market weight' on Saturday citing less favourable risk-reward in equities.
"We believe the risk-reward for Indian equities is less favourable at current levels," Goldman Sachs said in a research note.
Nomura had downgraded Indian equities as it believes valuations are too stretched and a lot of positives are already priced in, while UBS Securities said that Indian stocks look unattractive on the valuation front as they are “extremely expensive” compared to ASEAN.
Even CLSA has highlighted 10 reasons to book profits on India. Among the reasons mentioned in its note are higher energy prices, pressure on profitability, currency outlook, withdrawal of RBI stimulus, rich valuations, high probability of earnings disappointment and a potential lack of marginal buyers.
Macquarie said in a note to clients that the consensus builds in an aggressive earnings recovery and on these high estimates, India's two-year forward PE  is near all-time highs and a premium to Emerging Markets.
It added that even in view of the ongoing strong inflation risk, consensus still assumes an aggregate of 300 basis points of margin expansion into FY23 and sees earnings downgrades to work through in the coming quarter.
The foreign brokerage has mentioned 7 stocks under the 'relative underweights' category and 8 stocks as 'alternative buys'.
Relative UnderweightsAlternative Buys
United SpiritsBharti Airtel
Reliance IndustriesHPCL
Tata Power CoAsian Paints
Eicher MotorsNTPC
Axis BankTVS Motor Co
Gujarat GasICICI Bank
MindtreeGAIL India
Infosys
In the consumer space, Macquarie prefers Asian Paints instead of United Spirits.
For Reliance Industries Ltd (RIL), the brokerage said that its EPS for RIL for FY23-24 remains 30-35 percent below consensus considering lower cyclical margin recovery in oil-to-chemicals, significantly higher interest expenses, lower average revenue per user in Jio and lower revenue in retail.
Instead of RIL, Macquarie prefers Bharti Airtel to benefit from the digitisation exposure and HPCL for cyclical margin upside.
The brokerage sees a slower pace of recovery in the premium motorcycle space as compared to four-wheelers and scooters, which is why it prefers TVS Motor instead of Eicher Motors.
Talking about Mindtree, the brokerage sees margin headwinds in the near term from rising attrition and supply-side pressures, which is why it has tagged Mindtree as 'relative underweight' and prefers Infosys.
Among larger private banks, Macquarie prefers ICICI Bank over Axis Bank.
Disclosure: Network18, the parent company of CNBCTV18.com, is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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