Sensex target for End CY11e is 21,910 : Antique

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Outlook for 2011

Economic growth maintained, led by stable manufacturing sector and buoyant consumption:

India’s GDP growth is expected to sustain the growth momentum of the previous year. On similar lines, we anticipate a growth of 8.2% for FY12e (trailing five year average). We expect this strong growth will be supported by robust domestic demand led by the manufacturing sector, with services and agriculture providing an apt foil. Buoyancy in domestic consumption would still be the cornerstone of our economy.

Inflation, hardening interest rates and INR:USD gyrations could spook the markets:

Inflation may have become a structural issue with the Indian economy. Food inflation tends to be a bigger problem and apart from weather-related factors, we foresee other issues like supply disruption, poor logistics, etc., keeping inflation at elevated levels. The rising price of crude is the proverbial sword of Damocles and an untoward spike in the same poses a significant risk, post QE2. While we could benefit from the high base effect, one should not be lulled into a false sense of complacency due to easing headline numbers. Thus, it leaves little leeway to the government other than adopting a slightly hawkish stance, which along with gyrations in the currency market, could also exert a periodic drag on the economy.

Sensex earnings on course to maintain 22% growth for FY12e:

India Inc. would be able to capitalise on the benefits of the capex cycle which it commenced in FY08/09. The relatively high asset sweating and EBITDA margins, along with the proven tight control over input and operational costs would enable strong growth of BSE Sensex EPS by ~22% for FY12e at INR1252. We believe that interest costs coupled with liquidity and inflation can spook the earnings, despite India Inc. being prepared for the same to a large extent. However, the biggest derailment factor can be muted or disrupted government spending. While this would not pose a risk to the FY12e earnings growth, the same cannot be said of FY13e earnings as the same would also reflect the aftermath of the derailment of capex cycle of FY10-11.

Risk of slight contraction of P/E and P/B multiples due to growth, political, policy-making and fiscal factors:

The current valuation metrics could be factoring in sustained growth, both on a relative and an absolute basis. The possibility of growth turning sluggish is distinct, and that poses a risk to the high valuation metrics of Indian indices. The upheavals in political arena will have a fallout in the policy-making arena and the run up to elections in two critical states could again spawn some populist measures which could be counter productive for fiscal discipline and consequently to inevstor sentiments. Finally, there exists is the outside chance that any improvement in global outlook, especially the US, would cap interest in the Indian markets.

Thus, we are of the opinion that the markets would find its sweet spot at around the P/E level of 17.5 and P/B level of 3.5 for FY12e earnings and hence our Sensex target for End CY11e is 21,910. While there exists a good chance that the valuation and earnings metrics could get revised upwards, indication of the same would received post 2QFY12 numbers.