Ambit Capital finally turns optimistic, raises Sensex target to 29,500 for FY17 end

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Mumbai: Brokerage firm Ambit Capital Pvt. Ltd, among the most pessimistic on the Indian stock market, on Friday raised its target for the S&P BSE Sensex, predicting the benchmark equity index will gain over 10% from current levels by the end of the fiscal year. The reason: lower domestic risks, thanks to efforts by the Reserve Bank of India (RBI) to tackle bad loans.

In a note titled Taking the crisis call off the table, Ambit Capital, which had earlier said the Sensex could fall as low as 22,000 points, set its new target at 29,500 points by the end of 2016-17. The Sensex closed 0.48% lower at 26,635.75 points on Friday.

“…we take cognizance of the recent efforts of the RBI and the Bank Boards Bureau (to resolve the asset quality and liquidity issues facing the banking sector) by revising our base case scenario Sensex earnings multiple to 19 times (which is also the 10-year P/E average),” analyst Prashant Mittal said in the note on Friday.

The brokerage firm said that applying this multiple to its Sensex FY17 earnings per shares (EPS) estimate of Rs.1,550, its arrives at a revised target of 29,500 for Sensex.

In a note on 22 April, Ambit Capital analysts Saurabh Mukherjea and Mittal had pegged a Sensex target of 22,000 points.

“Even as the consensus view on India swings to ‘buy’, we still don’t see the point of running after the Indian market as a whole,” Mukherjea and Mittal had said in the 22 April note.

In April, Ambit analysts had argued that the then current state of affairs around the three factors—banking sector reforms, money market liquidity and consumer inflation in the western economies—did not give them sufficient comfort that the current rally is sustainable, and hence they stuck to their longstanding view that there is a high probability that the Sensex will touch 22,000 points.

In its note on Friday, even as Ambit Capital raised its target, it warned that the global macro picture remains bleak, and the substitution effects are being mistaken as green shoots.

Mittal pointed that even as Indian equity markets have rallied by 18% from their February lows, the risks emanating from a Chinese economy slowdown, the US Federal Reserve’s monetary policy tightening and deflationary scenarios in the European union (EU) and Japan persist.

“On the one hand, recent data from China and the US has increased the probability of a ‘deflation’ export from China, on the other hand, the BoJ (Bank of Japan) and the ECB (European Central Bank) have acknowledged the ineffectiveness of continuous monetary easing to resolve the deflationary spiral,” Mittal said in the note on Friday.

“Both these scenarios—a sharp yuan devaluation and the ineffectiveness of the European and Japanese banks in handling deflationary risks—represent a significant risk to the Sensex,” added Mittal.

According to Mittal, a mild pickup in the economy in the March quarter is a result of three substitution effects taking place in the economy rather than a cyclical upturn.

Mittal added that these were commercial vehicle demand substituting for falling railway freight demand, consumer durables demand substituting for real estate and jewelry demand; and private banks and non-banking financial corporations lending substituting for public sector banks’ lack of lending.