Global investment firm Morgan Stanley raised its BSE Sensex target for September 2019 to 42,000 from 36,000 in June implying 11 percent upside potential. The expected target for June 2019 was already achieved by the benchmark index in June 2018 itself, i.e. 11-month ahead of targeted month.
The Sensex has rallied 9 percent year-to-date despite intermittent correction in addition to around 28 percent jump seen in 2017.
The current target of 42,000 implies that the index will trade at 16.5x one-year forward P/E and 20x on trailing PE in Sep 2019, the brokerage house said.
It feels the key drivers for the index will be the broadening and deepening of earnings growth and greater conviction in a new multi-year earnings cycle during which the firm believes earnings could compound at around 20% annually for five years.
About the key risk between now and June 2019, Morgan Stanley said the market could turn pessimistic on the outcome of the general elections scheduled in May 2019.
"If investors start expecting that the electorate will deliver a fragmented verdict with weak leadership, the index will likely head towards our bear case (i.e. 33,000 level on the Sensex, which is 20 percent probability), especially if such expectations coincide with deteriorating global equity markets.
It expects Sensex earnings growth of 23 percent YoY in FY19 and 24 percent YoY in FY20.
The investment firm has made some changes to its Focus list.
The filters used to shortlist stocks for the Focus list are as follows:
The first filter is Market underperformers, which means stocks that have underperformed the market over the past 12 months.
The second filter is Earnings underperformers. "We look for companies whose fundamentals have been weak with slow earnings growth and return on equity (ROE) below the standard deviation from the average," it said.
And the last is Outlook. "We choose stocks rated Overweight by Morgan Stanley and where our analysts expect a positive change in ROE along with EPS growth in excess of 10 percent over the next two years."
Accordingly, Morgan Stanley added State Bank of India, Apollo Hospitals Enterprises and Prestige Estates Projects in place of Infosys, Zee Entertainment and Havells.
The stocks being replaced have been recently downgraded by its analysts from Overweight.
In current year so far, State Bank of India stock has fallen 12 percent, Apollo Hospitals Enterprises 11 percent and Prestige Estates Projects 27 percent, while Infosys rallied 39 percent, Zee Entertainment declined 22 percent and Havells gained 15 percent.
Here are reasons and expectations by Morgan Stanley for adding above three stocks in Focus list:
The government's recapitalisation move enabled state-owned (SOE) banks to recognise problem corporate loans as NPLs and to increase provisioning. We expect improvement in overall provisioning and NPL slippages to drop sharply in F2H19. However, loan loss charges are likely to remain high as banks take coverage towards 60 percent with IND-AS rolling in from 1 April 2019 (base case).
Core PPOP growth should start picking up from second half of FY19, as NPL formation slows down and higher rates help margins expand. Given its strong liability franchise and technology, SBI is better positioned relative to other SOE banks to sustain growth and ROE.
Operational improvement in the ensuing quarters driven by all the three revenue segments: 1) hospitals - occupancy ramp up, improvement in ARPOBs and ALOS; 2) steady growth in Standalone Pharmacies (20 percent plus); and 3) AHLL retail losses to be narrowed for target break even in first half of 2020. Valuations seem inexpensive at 15x F20 EV/EBITDA.
It has a balanced portfolio of developmental and rental projects, both of which have good scale-up potential. Presence in healthy south Indian cities (Bangalore, Chennai and Hyderabad), will be complemented by diversification to NCR and MMR markets. Valuations appear reasonable at 51 percent discount to Mar’19 NAV.
Morgan Stanley has Overweight rating on above three stocks.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. The above report is for information only and not buy or sell recommendations.
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