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๔ The first half of 2012 unfolded in line with our expectations with
markets remaining in the broader range. The political
leadership in Europe continues to flip flop on policy measures
and solvency concerns with whispers of liquidity easing rising
while the US continues to focus on domestic topical issues in
an election year. Investors continue to perceive US bonds as
safe havens (yields at multi-year low of 1.5%) while lack of
alternatives and risk-off trades led to record low yields on
German bunds, a rise in dollar index, Swiss franc and gold.
Fears of moderating growth in China led to commodity sell-offs
including crude, a blessing in disguise for India
๔ However, starting July-August 2012, domestically things have
started looking up. The key surprise was the pick-up in policy
action from the government side. The key moves being
deregulating the petroleum products, hiking limit of FDI in retail
and aviation, proposing SEB reforms, direct transfer of cash
subsidy, etc. Though it will take time to see the fruits of the
above moves, getting the intent right has certainly lifted the
animal spirits. Consequently, the markets have cheered the
same and posted a handsome rally with FII flows reaching
record levels of $18.4 billion in YTDCY12. Even on the earnings
side, we expect earnings to be tough in FY13E and look up in
FY14E given the stage is set for rates to come down,
commodity prices are looking weak (amid a global set-up) and
a pick-up in domestic economy on the whole
๔ We are upgrading our CY12E Sensex target range on the back
of better-than-expected earnings, liquidity driven rally, muted
expectations and rolling forward to FY14E. We now expect the
Sensex to trade in the range of 16484 (13x FY13E Sensex EPS
of 1268) – 20146 (14x FY14E Sensex EPS of 1439, upside of
15%). Our bull case target multiple is in line with the historical
average multiple of 14x while our base case Sensex target now
stands at 18707 i.e. 13x FY14E EPS, an upside of 7%. Parallel
levels on the Nifty are 4950 on the lower side and 6050 on the
higher side
In terms of sector preference, we expect auto (overweight on fourwheelers
and underweight on two-wheelers), pharma (earnings
visibility), telecom, banking (private banks positive, PSB neutral) to
outperform while we are neutral on capital goods (policy inaction),
IT (global macro headwinds), FMCG (valuation concerns) and
cement. We expect, infrastructure & real estate (stretched balance
sheet), oil & gas (subsidy burden), power (delay in reforms) and
metals (global slowdown) to underperform
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