Deutsche Bank ups December Sensex target to 20,000
Deutsche Bank has raised its December 2012 Sensex target to 20,000 from 18,000 at the start of the year. This has been done in the backdrop of the recent back-to-back announcements on fuel price rationalisation, followed by opening up of foreign direct investment in multi-brand retail, aviation, power exchanges and broadcasting services.
Research analyst Abhay Laijawala and strategist Abhishek Saraf in their note said that this is a huge signal, symbolic of the government's reform commitment and an endorsement of its recognition of the urgency to put the economy above politics, for now.
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The announcements have come at a time when there was unanimous skepticism over the government's ability to meander through the volatile minefield of coalition politics. Further, the timing of the announcement is favourable as it has come in tandem with positive announcements from Europe and US central bankers, and will ensure that India does not miss out on the ongoing global risk rally. They add that the most immediate impact of the announcements will be on the external accounts (through encouraging capital inflows – institutional and corporate) and on the Indian rupee, where rating downgrade concerns had emerged as a very worrying overhang.
The new December 2012 Sensex target of 20,000 implies a return of around 8% from current levels and at 20,000, the Sensex would then trade at a one-year forward price-earnings multiple of 14.8, an 8% discount to its past five-year trading average.
The Deutsche Bank analysts also added that while the measures are certainly positive and indeed encouraging, the sustainability of the rally after the initial strong velocity will be driven by a combination of factors ranging from the way how the government handles a belligerent opposition, a possible monetary loosening, the ultimate outcome of the coal allocation controversy, deteriorating asset quality of Indian banks and state electricity board reforms (expected after the cabinet reshuffle, which will take place over next seven days).
Investors will also be looking for further steps on faster administrative and environmental approvals for large investment projects in both the public and private sectors to ensure that worries of a slowing investment cycle do not risk becoming structurally embedded.
Laijawala and Saraf feel that investors looking to play the beta rally should increase exposure in banks, metals (although they feel that after the initial momentum, China slowdown concerns may temper rally), real estate and select infrastructure names and trim positions in IT services and pharma (on recent strong performance and expected rupee appreciation).
Unless the RBI does not change its hawkish stance, they believe that expectations of monetary loosening increases the risk-reward for public sector banks, where their preference remains SBI (high beta, low exposure to power sector). Preferred picks for now as per them are Axis Bank, Tata Steel, Yes Bank, Cummins, ICICI Bank, JSW Steel, DLF, SBI, Reliance Industries and L&T.