Decent domestic trends (Lesser than feared impact of demonetisation, balanced budget, UP poll results and progress on GST), stable dollar and Fed commentary have resulted in a nice up move YTD. Our India Sentiment Indicator remains elevated and implies mid-single digit returns. We remain constructive on the market medium-term, acknowledging that earnings acceleration is key for upside to play out. We set our Dec-17 Sensex target at 31,500, 7% upside. Domestic flows have been very strong over the past few months. Our economics team expect flows to remain very strong over next couple of years. MSCI India trades at a 40% premium to the MSCI EM, not too different from the 36% average premium at which it has traded over the past 10 years. Valuations are not cheap though.
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Key risks are earnings disappointment over the past few years. Global events which could impact EM flows negatively and increase in crude prices, which could lower India’s attractiveness in EM context.
Given the disappointments over past few years, there remains skepticism around the 18% consensus/Citi NIFTY earnings growth expectation for FY18E. We look at key sectors driving the earnings estimates below. Bottom-up estimates do look optimistic; however, we believe we should see acceleration in FY18E earnings growth over FY17E. Outlook/confidence on earnings remains a key driver for the macro/flow driven rally to have more legs.