A Reuters poll last week said the Sensex will hit 18,750 by the end of 2012, from current levels of around 17,400, and to 20,400 by the middle of next year. Even before that, a few foreign brokerages upgraded their weightages for India?JP Morgan and Deutsche Equities are now overweight India while Morgan Stanley is equal weight. Among the reasons for the upgrade are that the market has priced in most of the negatives and that valuations now look ?interesting? with the EV/EBITDA ratio now near-record lows, relative both to history and the rest of the region. As of now, the Sensex is trading at a multiple of between 14-14.5 times estimated 2012-13 earnings or close to14 times one year forward. Most analysts have pencilled in a conservative 10% rise in earnings for the Sensex set of companies, a few feel 12% should be achieved. India has historically traded at an average multiple of 15 times forward earnings, which means the market is not expensive but neither is it cheap. Therefore, some of the optimism might be misplaced.
True, the falling price of crude oil is a big plus for the Indian economy and, as one brokerage points out, India tends to perform well versus MSCI EM after a period of oil price declines. That?s probably one reason the markets have been so resilient despite the rupee having depreciated so sharply over the past year. But while a weaker rupee should have given India?s exports a leg up, that trend doesn?t seem to be playing out just yet; exports slipped 4.2% y-o-y in May while export volumes at Bajaj Auto have fallen 18% y-o-y in June. And as long as the global economy remains sluggish, growth in exports will be subdued. Again, while a smaller trade deficit helps, what we need to see is a pick-up in investments; in other words, a turn in the capex cycle. Even while a couple of banks may have pruned loan rates, money is not going to be meaningfully cheaper in the near future?that SBI needed to hike deposit rates is a clear sign of that. More importantly, policy reforms need to come through quickly so that companies can start adding capacity; the core sector grew at just 3.8% y-o-y in May, which means industry continues to grow very slowly. Sales of medium and heavy CV sales at Tata Motors?a good proxy for the economy?continue to be sluggish, lower by 21% y-o-y in June. Unless there are big-time reforms starting with a big increase in diesel prices, India could continue to under-perform its peers. Crisil?s stunning forecast, of the rupee at 50 by March, is also predicated on domestic policy measures to revive growth.
