A lot of macro factors are falling in place to create the right conditions for the
markets to rally in the coming year. Brent crude oil prices have declined ~66%
over the last two years to $33 as against ~$99 at the end of CY2013, resulting in
significant savings for the government. Led by lower crude prices, the net import
bill has reduced at a CAGR of 16% to $115bn in CY2015 as against $192 bn in
CY2012, resulting in a steep decline in the current account deficit.
With these savings, the government has also been able to maintain fiscal
discipline, despite an increase in infrastructure spending. We are already seeing a
strong bid pipeline of `120,000cr from the NHAI and of over `244,000cr from
the defense sector, expected to get tendered over the next 12 months.
Accordingly, we expect uptick in government spending to result in private sector
capex cycle revival. We believe the revival in the investment cycle will be the key to
push the earnings trajectory upwards over the next few years led by the multiplier
effect of infrastructure spending.
Inflation too has been on a firm downtrend with the CPI averaging 4.8% between
Jan-Nov CY2015, as against 6.7% in CY2014, while the WPI has remained
negative. Despite a seasonal uptick in inflation, lower crude prices and sufficient
foodgrains stocks, will help keep overall inflation on the downtrend. With inflation
under check, we believe the RBI will have enough headroom to reduce policy
rates further. Also with banks now beginning to transmit these lower rates, we
expect lending rates to decline by ~100-125bps over the coming year, acting as
a strong catalyst for earnings growth in CY2016.
With growth expected to pick up, India is in fact the best placed among emerging
economies to continue attracting higher fund inflows over the long term as China
continues to grapple with a slowdown in economy and lower commodity prices
will hurt Brazil and Russia. Confidence among domestic investors also continues
to remain strong with strong mutual fund inflows of over Rs70,000cr in CY2015.
Within large caps we continue to like sectors where earnings growth continues to
remain strong such as automobiles and IT. With falling rates and huge underpenetration,
we believe retail finance companies, especially players focused on
housing finance, are also likely to perform well. From a bottom-up perspective, we
continue to like select emerging midcap companies with strong brands,
entrepreneurial success and healthy growth outlook. We expect Sensex earnings to
increase at a CAGR of 17% over FY2016-18 to ~`1,993. Based on our estimates
our one year Sensex target works out to 31,500, implying a 24% upside from the
current levels.
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