>Stay bullish, raising Sensex target to 22000 (DEUTSCHE BANK)

■ 2010 annual Sensex target of 22,000
We are setting our one year forward target for the BSE Sensex at 22,000, implying an upside of 25% from current levels. Our target implies a PE of 21x on our current FY11 earnings estimates. We believe that the market is underestimating the growth potential since a more convincing, revenue driven, EPS upgrade momentum has just begun.

■ Banking on return to 8-9% GDP growth trajectory
Our 2010 India outlook is premised around two broad themes – a shifting paradigm in the composition of global economic growth and the restoration of Indian GDP growth to a 8- 9% trajectory over next twelve to fifteen months. The key theme for the Indian equity market in 2010 will be the domestic economy and the pace at which economic growth is restored back to the 8-9% growth trajectory. While consensus is still cautious on the restoration of above trend growth, we remain confident that the economy is on course to moving back towards the 8- 9% growth trajectory.

■ Robust consumption to result in return of investment cycle
We believe that the next leg of market re-rating will occur when the investment cycle makes a decisive comeback. We are convinced that strengthening domestic consumption and accelerating momentum in employment generation – across swathes of rural and urban India – is raising business confidence. We expect these factors will lead to an accelerated return of the investment cycle, which should drive the next round of GDP upgrades, upward revision to earnings forecasts and rising conviction in the restoration of the 8-9% GDP growth trajectory.

■ Our investment ideas
DB Investment themes – domestic consumption and consumption derivatives (autos, metals, paints, private sector banks), infrastructure (we prefer power generation equipment suppliers over T&D equipment suppliers) and software ( we are more confident of front ended returns in 1H). Our Top Buys - : Asian Paints, BHEL, HDFC Bank, ICICI Bank, Infosys, Maruti, M&M, SAIL, Sterlite, TCS. Our top mid-cap picks are: Auro Pharma, Bajaj Hindusthan, GVK, Onmobile, and Thermax.

■ Tug of war between inflation and growth, but low risk of sudden policy reversal
We think 2010 will also see the market being swayed by a tug of war between inflation expectations and growth. We sense that the current UPA administration remains biased towards growth, reducing the risk of any knee-jerk policy error. The return of non food inflation could bring back the overhang of an ‘inflation wary government’, which may impact valuations of materials companies. A sharp rise in global oil prices raises risk of aggressive policy response. Global macro factors – strengthening dollar, weaker than expected global growth - are key risks.

To read the full report: INDIA EQUITY STRATEGY