Even as a stubborn inflation, need for fiscal consolidation, high interest rates and a sluggish earnings growth loom, a stable government at the Centre may lead to a re-rating of the Indian equity market, believe experts. A strong political mandate for the BJP-led NDA has raised hopes of crucial and speedy reforms.
As the Street starts discounting Indias growth recovery and policy reforms from the new government, the markets valuations measured in terms of price-to-earnings (PE) multiples may see an expansion.
Deutsche Bank, for example, has upped its year-end target for the 30-share Sensex to 28,000, implying gains of 16% hereon. The foreign brokerage argued that the election verdict justified a re-rating of the Indian market, given that, over the last decade, a fragmented coalition with differing economic ideologies had been the key reason for the economic malaise.
An increasing number of analysts and brokerages are now raising their medium-term targets for Indian benchmarks despite acknowledging a weak earnings trajectory and muted industrial growth.
Ambit Capital raised its P/E target for FY15 from 17 to 20, noting that a majority government will compound reform expectations. The brokerage raised its FY15-end target for the Sensex to 30,000, taking into account a 14% y-o-y growth in the earnings per share (PES) to R1,500. Analysts expect valuations to remain elevated and, even expand further, if the governments economic agenda pleases the Street.
According to UBS, investors would be willing to give a premium to the Indian market due to their growth hope as they start looking beyond the FY15 earnings estimates. It revised its 2014 target for the 50-share Nifty to 8,000, based on its outlook of 15% earnings growth for FY16 and a convergence of the PE multiple to its five-year average.
The crushing win for the BJP has led to comparisons with the market multiples of after May 2009 when the Congress-led UPA stormed back to power despite expectations of a fractured mandate.
Macquarie recently noted that after the 2009 election outcome, markets not only re-rated by 27%, but also sustained an average PE multiple of 16.5 for the next 18-months.
The brokerage drew an analogy with the impact of a decisive election outcome in Japan in late 2012, which resulted in an 80% rally in the domestic market within six months.
It concluded that Modinomics is matching the Abenomics euphoria and that the latest market rally may just be