Why Sensex will take out 29,000 this year: BNP Paribas

Raychaudhuri said he was more modest in his earnings expectations, at about 12-14 percent, and said that a marginal rise in the PE ratio would take the Sensex to the brokerage's 29,000 target.Below is the verbatim transcript of Manishi Raychaudhuri’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: This has been a liquidity driven rally across many emerging markets (EMs) and today we got some fairly decent Purchasing Managers' Index (PMI) numbers from China; decent as in, in comparison with previous months. Should the EM fund flow continue? A: I think so, yes. Some of these numbers have improved as you rightly pointed out and secondly we have also had a lot of dovish sentiment expressed by the global central banks off late. The Fed in mid-March and again off late Chairperson Janet Yellen’s, statement couple of days ago, kind of underscores the fact that there is unlikely to be any rate hike in the near-term. We have heard similar sentiments from Bank of Japan (BoJ) earlier, from the European Central Bank (ECB) earlier and also from the Bank of England which postponed its rate hike target from 2016 to 2017. So, I think a combination of all this implies that this mild uptick in commodity prices that we have seen, the stabilisation, and also this stabilisation and some depreciation in the US dollar is likely to continue for the time being, which is good news for EM flows. It has historically always been that way and that is why we think that the flows that we have seen in the month of March are likely to continue for a while longer. Sonia: I read in your note that you have December 2016 Sensex target of 29,000, which is a big upside from here. What is that based on, will it purely be led by global cues or do you expect to see some amount of improvement in earnings that could led the upside as well? A: When I was here on your channel just before the Indian Budget, I think that was late February, the market was about just below 23,000 on the Sensex, 22,800 or so. I had expressed the same target, 29,000, that has not changed. It is predicated on two things, one, very early teen kind of earnings growth in fiscal 2016; somewhere around 11 percent to 13 percent and some rerating, not more than 5 percent to 7 percent or so. These two things put together we think would propel the market about 20 percent and at that point of time it appeared like a significant upside. It was almost about 30-35 upside from those levels. Now, of course the market has moved up another 15 percent from there, but, the target remains same and it is predicated on about maybe 11-13 percent earnings growth and some small rerating from here. We think that the consensus earnings estimates for FY16 and FY17 are still significantly higher than what could be achieved. I can see consensus numbers at about 17 percent for fiscal 2016. I think they will have to come down though a large part of these earnings estimate declines have already happened. We are possibly in the last leg of earnings estimate decline.  Latha: Any comments at all on if a deal like HCL Technologies and Geometric should happen, how would you approach HCL Technologies as well your views on the IT space? A: I won’t comment on individual stocks but, yes, we are positive on the Indian IT space. These acquisition targets that you talk about, they are actually quite common in times like these when there are interesting stocks, good quality stocks with growth opportunities which are trading at a steep discount to their inherent values. That is when other companies get interested in taking over these companies, which obviously adds some degree of inorganic value to their own inherent businesses. In general, on the Indian IT services space, we think that the eventual recovery in US and Western Europe, is obviously driving revenue towards the large companies and in this space we are really more focused on the top three or four large corporate’s because we think that they will be the primary beneficiaries of this potential upturn in business, they are the ones which are restructuring their own businesses to improve their margins. As a consequence, we do have an overweight on the Indian IT services space. This is one of the spaces in India that we are keenly focused on. Sonia: Apart from technology, what are the other spaces or sectors that you would be bullish on for the next six to eight months? A: I would say building materials, particularly cement. Also, private sector banks but I can’t make a blanket statement on them. We are more focused on the ones which are concentrated in the retail lending space. Apart from that, a few select engineering or industrial companies, particularly those which don’t have lot of leverage on their books and which are focused in various different areas of infrastructure.Finally, I would think some of the consumer discretionary, also, some of the consumer staples – tobacco for example would obviously be a choice when it comes to that discussion. So, that is really the core spaces, the three or four sectors in India that we are focused on. On an overall basis, we are still overweight India. We think that a combination of this revival in economic growth and the potential earnings recovery that we are seeing in the second half of the year should lead to this continued outperformance that we have seen lately.Latha: Will there be midcap outperformance now, here on immediately; would you be more interested in midcap stocks and in the Nifty, what will be the vanguard that will take it to that or rather in the Sensex that will take it to 29,000? A: Your second question is possibly easier to answer. The sectors that I talked about, which are a combination of economy linked sectors and the ones which are getting the impetus from some degree of global recovery, if you look at these private sector banks, some select few industrials, select few consumer discretionary and IT services, that is actually almost about 50-60 percent of the overall market. So, it is not difficult to see what could propel the market to about 15-20 percent higher from here which is a level we are talking about. Having said that, for those conditions to come about, we need some degree of earnings recovery. For last four quarters, we have had earnings disappointment in each and every quarterly season. We think that the recovery could come about from two things. One, the industrial recovery or the investment recovery which for the foreseeable time horizon would be driven entirely by the government sponsored projects and secondly, some degree of consumption recovery led by rural consumption because that is the area that was faltering. It will be possibly a combination of the monsoon recovery – we will get confirmed news on that only around June-July, some degree of impetus from the seventh pay commission in the rural and small to mid tier towns. If you look at the key components of the economy that is private consumption and investments, there is a possibility that the lack of impetus of past several quarters could be corrected over the next two or three quarters. So, that is the reply to the first segment. As far as midcaps go, I would think it is difficult to paint a very broad brush picture at this point of time because there are a few sectors where midcaps do look attractive. I would think pharmaceuticals, possibly some of the engineering orientated sectors as well, some of the consumer discretionary and staple sectors, these are some sectors where the midcaps do appear attractive; they do have growth opportunities going forward. However, broadly I would say that it is better not to look at the stocks in terms of largecaps or midcaps but look at those companies which are cash generating, those companies which have good management quality and growth opportunities. So, it is essentially the fundamentals that are going to matter in the medium-term.(Interview transcribed by Priyanka Deshpande)