Tuesday, September 1, 2009


March 2011 Sensex target of 20,000
Despite the rally in Indian markets, we believe fundamentals and liquidity are likely to support higher valuations. We believe Indian stocks are likely to re-rate further over the medium term as positive data points relating to IIP, GDP, quarterly earnings show positive momentum. Given FY2011 will fully capture the economic recovery and corporate earnings, we now set a March 2011 target of 20,000 based on a P/E multiple of 14.9x FY12 earnings. Sensex is trading at a forward PE of 15.9x and forward P/BV of 2.6x.

Increase exposure to metals, power, real estate & IT services
We add Tata Steel and JSW Steel with overweight stance on metals sector due to bullish outlook on the Indian steel sector (Indian Steel: Green shoots or weeds? dated 25 Aug 2009). We turn overweight on Power sector due to positive outlook on coal and good progress on projects under execution. We continue to stay bullish on real estate as a play on India's economic recovery. We maintain our O/W exposure to Indian IT services as we believe the sector is a great way to play the global recovery.

Reduce autos, banks, telecom to neutral
We also reduce our weights on autos (neutral), telecom (neutral), banks (neutral) and consumer staples (underweight) as we believe these sectors are likely to underperform given negative newsflow regarding monsoons. We also reduce cement & pharma to underweight. We maintain cash level of 5% in our portfolio.

To see full report: INDIA STRATEGY