>STRATOSCOPE (JP MORGAN)

Indian Equities - Valuations re-visited

• Valuations re-visited. We evaluate market valuations considering different growth assumptions and valuation methodologies. Earnings based valuations, derived from current growth estimates (a CAGR of 14% over FY09-11E) suggest a trading range of 12,500-16,500 for the BSE Sensex for the current fiscal year. Valuation models that do not depend excessively on near term earnings – P/B-RoE and long term DDM – also suggest a reasonable upside.

• Special focus: Valuations vs macro variables. An analysis of the relationship between 12 month forward PE multiples and key macro economic variables, suggests a meaningful relationship with IIP and the exchange rate. The relationship with interest rates and inflation is
however not significant.

• Near term consolidation. We have been arguing for near term consolidation following the sharp rally, post the election results. A substantial equity issuance pipeline and the weak progress of the monsoon are near term pressure points. But we remain constructive on a 12-18 month view, given the policy freedom available to the new Government and await initiatives herein in the Budget scheduled for July 6.

• Portfolio stance. We remain positive on local growth, with a bias towards the investment cycle. We are downgrading Consumer Discretionary from overweight to neutral following substantial outperformance over the last three quarters and concerns over the weak progress of the monsoon. We are also adding weight to IT services, given signs of an improvement in tech spending. We are adding Satyam to our model portfolio.

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