After another muted quarter, which showed weakness across the board on the back of a slowdown in economic activities in the country; global brokerage Nomura cut Nifty earnings estimate as well as its December 2020 target.

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The Nifty Universe reported earnings growth of 9 percent in the third quarter compared to the same period a year ago, missing the consensus estimate by 4 percent which led the brokerage to cut Nifty earnings estimates for FY21 and FY22 by 2 percent and 0.9 percent, respectively.

Valuation

Nomura also reset its Nifty target to 12,840 from 13,070 earlier, implying an upside of 6 percent from the current levels. The brokerage said that the Nifty is trading at 18x 12-month forward earnings.

With the cost of funding sustaining at current levels, there is a limited upside to market valuations, in its view. Further risks could potentially emerge from Coronavirus in China due to supply chain disruption for Indian industry and global risk aversion to equities, with increased risk to global growth, Nomura cautions.

Hence, it estimates a downside risk of 5 percent and 3 percent to current consensus estimates for FY21 and FY22.

Portfolio

Post Q3, Nomura's investment approach remains selective, with a preference for investment over consumption space. It offers a portfolio that is positioned for a gradual recovery in growth, which it believes will lead to outperformance of cyclical. Top picks of the brokerage include ICICI Bank, Axis Bank, L&T, KEC International, and Dr. Reddy's – all rated buy, remain unchanged.

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Earnings estimates

For Q4FY20, the brokerage's estimates now factor in 22 percent earnings growth (ex-financials 6 percent) and an overall 47 percent earnings rise between FY20-22.

"Financials and telecom drive 18 percent and 8 percent of the increase in consensus earnings estimates over FY20-22, respectively. We see risk to current consensus Nifty earnings estimates for FY21 and FY22 given risk in estimates for Financials and Oil & Gas sector," explained Nomura.