Although the recently published 2015 Sensex targets by various foreign brokerages depict similar market returns for the coming year, the nature of their bullishness appear varying.
Even as the broader tone of analysts seem very positive as they factor in impending interest rate cuts, recovery in earnings growth and government’s policy actions into their expectations, their price target for 2015 appear modest compared to the stellar rally of 34.5% reported by 30-share benchmark in 2014 so far.
This week three foreign brokerage including Citi, Morgan Stanley and Macquarie Securities have released their 2015 market outlook that set forth 14-16% gains in the benchmark indices for the year. While all three appear to agree on the positives an imminent interest rate cut and persistent pace of reforms could bring, their views on earnings recovery differ.
Morgan Stanley which is seems most ahead of the consensus earnings estimates for fiscal 2015-16 sees Sensex ending the year near 32,500. The foreign brokerage believes that the key to the valuation story and India’s performance in 2015 is the forthcoming earnings cycle wherein it sees the EPS (earnings per share) of the Sensex companies growing at an average of 24% in the next two fiscals (FY16, FY17).
On the other hand, Citi which has pinned a target of 33,000 for the Sensex in 2015 believes that consistent economic and earnings uptick is only likely in mid-2015, citing modest near-term visibility in loan growth and investments, and caution amongst corporates while regulatory reforms are still underway.
“2015 should be front-loaded with falling rate gains, back-loaded with an actual economic/investment recovery; and accompanied by steady regulatory/execution reform,” says the brokerage in a research note dated November 28.
Macquarie Securities, the latest brokerage that announced its 2015 outlook on the other hand thinks that the market still has some re-rating potential and has pinned a target of 9940 for the broader Nifty.
The brokerage observes that consensus forecast of 19% PAT growth for FY16 , driven by expectations of a 14% revenue growth and 50 basis points of margin expansion, is much lower than the 40% growth levels seen in previous up-cycles . The estimate doesn’t factor in the impact of operating and financial leverage as demand improves, inflation abates and interest rates ease.
Although the current valuation multiples- about 15 times EPS and 3 times book vale – are a tad above long-term average, “ the market can re-rate further to 16-17x if economic recovery is stronger than expected,” notes Macquarie.