Nomura analysts believe the markets are not yet expensive. There have been two key drivers of market performance from the bottom in early September 2013 significant improvement in the markets macro ecosystem and election-led euphoria, which does discount expectations of some pick-up in growth. However, the markets earnings multiple is still not expensive, in our view, Nomura said in its report No Longer Limping.
As per Bloomberg data, the Sensex currently trades at a price-to-earning multiple of 18.36, which is the third most expensive within the emerging markets.
Analysts add that a higher growth trajectory would lead to a re-rating of markets. Our new target is based on a conservative 12% earnings CAGR for FY14-17F (vs consensus at 15.5% earnings CAGR) and ~9% re-rating of the markets earnings multiple to 16.4x from the current 15.0x, Nomura analysts Prabhat Awasthi, Nipun Prem and Sanjay Kadam said in their report.
The Narendra Modi-led government is expected to reverse the growth slowdown. We note that sequential acceleration in growth for most data series started around the beginning of the year, and because most of these series include data until June/July when the Modi-led NDA government was a mere month-and-a-half old we expect to see this momentum picking up further in the coming months as the new government finds greater traction and becomes more confident with its mandate to reverse the growth slowdown, the report said.
The Sensex has gained 8.42% since Modi was elected PM on May 16, 2014. YTD, the BSE benchmark has gained 22.43%. Auto sector and industrials are expected to pick up in the coming days. We are upgrading our underweight stance on autos and industrials (infrastructure, construction and capital goods) to overweight, Nomura said.
Among other brokerages that have raised their target prices recently, Deutsche Bank sees Sensex at 28,000 by end of 2014. BofA ML has a more conservative target of 27,000 points by end of 2014. Ambit Capital sees the Sensex at 30,000 by March 2015.