Brokerages bullish on Sensex, revise targets after Modi win

June 5, 2014

By Sankalp Phartiyal and Aditya Kalra

Indian stock markets rallied to record highs in May with the benchmark BSE Sensex breaching the 25,000 mark for the first time after Narendra Modi won a clear mandate to govern Asia’s third-largest economy.

Markets surged as Modi’s Bharatiya Janata Party (BJP) and its allies stormed to power on promises to revive India’s struggling economy, which is growing below 5 percent, and create more jobs for its 1.25 billion people.

The Sensex touched a record high of 25,375.63 on May 16, the day election results were announced, while the broader Nifty hit a life high of 7,563.50 the same day. The Sensex is up 18.1 percent so far this year.

The surge, especially in mid- and small-cap stocks, also helped India’s diversified equity mutual funds rise an average 11.5 percent, their best monthly return since 2009.

After May 16, several brokerages have revised their Sensex targets upwards, hoping the economy would recover and grow faster under the new Modi government. Here are some recent Sensex target revisions:

Karvy @ 100,000 – “We see 2014 bringing a new bull cycle into existence,” Karvy Stock Broking said in a report released on June 4, predicting the benchmark Sensex will reach levels of 100,000 points by the end of the decade.

To reach this level, the Sensex would need to grow by 26 percent annually till 2020. In other words, the index would have to quadruple from the current level of around 25,000 points.

“There is no reason that India can’t see a prolonged economic growth cycle with low inflation. The prolonged economic growth can create similar equity market returns in India as seen in United States in 1980s,” Karvy said in its note.

Deutsche Bank @ 28,000 – In a report released on May 25, the bank reiterated its target of 28,000 points for the BSE Sensex by December, adding that it hopes the new government will push for reforms and focus on the revival of manufacturing.

“We expect the new government to start plucking the low hanging fruit through focusing on large stalled projects, accelerating decision making processes, incentivizing bureaucrats,” Deutsche said in the report.

The bank, which is overweight on lenders, industrials and energy stocks, listed Axis Bank, Bank of Baroda and L&T among their key picks. It is underweight on consumer staples and telecom.

However, on May 23, Deutsche downgraded Indian stocks to “neutral” from “neutral/overweight” relative to other global emerging markets, saying valuations appear “very stretched” against lower GDP growth.

Ambit @ 30,000 – In a report titled “The rebooting of India” on May 19, the brokerage house raised its Sensex target for end-March to 30,000 from 24,000.

The brokerage said it sees a beginning of a ‘fourth wave’ in India’s economy and markets, listing three waves over the last 30 years: from 1984-1991, from 1991-2004 and from 2004-2013.

“Over the last 30 years, two-thirds of all returns have come in the initial three-year period after the general elections that have marked the beginning of these waves.”

Bank of America-Merrill Lynch @ 27,000 – The investment bank raised its target for the Sensex to 27,000 from 25,500, adding that a stable government will be able to drive reforms.

“History too favors a strong market post-election. In 5 of the previous 7 elections, markets gave a positive return 6 months and 12 months post elections with an average return of 11 percent and 36 percent respectively,” it said in its report dated May 18.  

Among sectors, BofA-ML expects mid-cap shares to outperform large caps. In May, the BSE Sensex surged 8 percent but smaller peers outperformed — the mid-cap index rallied 15.6 percent and the small-cap index surged 20.4 percent.

Nomura @ 27,200 – After a decisive election mandate by the BJP, Nomura in a report titled “India’s tour de force” on May 17 revised its Sensex year-end target to 27,200.

A strong government will help mitigate bureaucratic risk aversion and jump start a weak investment cycle, it added.

But Nomura also cautioned that it is important to keep in mind the challenges Modi will face going ahead.

“Despite the scale of Mr Modi’s victory, keeping the NDA coalition united in pushing through reforms will not necessarily be straightforward, especially after the incoming government’s ‘honeymoon’ period is over,” Nomura wrote.

(Editing by Tony Tharakan; Follow Sankalp on Twitter @sankalp_sp, Aditya @adityayk and Tony @TonyTharakan. This article is website-exclusive and cannot be reproduced in any form without permission)

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/