Kshitij Anand Moneycontrol News
The S&P BSE Sensex reclaimed mount 30K earlier this week to hit a fresh record high and if earnings recovery happens better than estimates, then Sensex could well hit mount 39K by December 2017, Morgan Stanley said in a report.
Earnings revisions will likely turn positive in the coming six months after six years in negative territory. Valuations are not yet stretched against history, other markets and bonds.
Rising demand for equities from domestic households and potential M&A activity could take multiples higher in coming months, said the report authored by Ridham Desai and Sheela Rathi.
Morgan Stanley’s December 2017 target, the BSE Sensex would trade at 16x one-year forward earnings, similar to its historical average. The bull-case multiple would be 17x our bull-case earnings and about 19x our base-case earnings.
There is a 30 percent probability that Sensex could trade at 39K on policy reforms as well as global factors. The much talked about earnings growth accelerates to 19 percent in FY2018 and about 27 percent in FY2019.
Bulls were in charge of D-Street which is evident from the fact that benchmark indices are trading recording highs so far in the month of May.
How does one participate in this market where bottom-up opportunities appear scanty? It is only a problem if one remains anchored to past winners. Morgan Stanley identified five themes to look for winners such as M&A, Capex, under-owned stocks, correlations, and growth at reasonable price.
The investment bank is positive on stocks which include names like IndusInd Bank, RIL, Jubilant Foods, HCL Technologies, Infosys, Bharat Financials, Glenmark Pharma, M&M, and Bajaj Auto.
Morgan Stanley explains that the growth cycle is fast turning and this could be the beginning of a new growth cycle. “If you are ready to humour us then we would take this further by saying that earnings could compound at 20 percent over the coming five years (in the 2003 to 2008 cycle, index earnings compounded 40%),” said Ridham Desai.
The growth cycles are accompanied by an expansion in multiples and at least under this scenario the Nifty likely triples in five years.
Morgan Stanley does not find valuations to be that rich and it depends more on what you are comparing it with. “If one is comparing valuation relative to US equities this is about as attractive as Indian stocks have been in a while,” said the note.
India's own P/B is at historical average compared to emerging markets (EMs), India looks rich but then return on equity (ROE) is gapping higher.
The global investment further added that the Sensex is still in buy zone versus local bonds but midcap valuations look stretched. Valuations are useful to make a market call only at extremes which is not the case at the moment.
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