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I-Sec Sensex Expectation – Bearish

October 12, 2008

Due to marked deterioration in earnings outlook ICICI Secucties – i-Sec has lowered our target PE multiple to 11.8x (one Standard deviation below the 8 year mean of 15.9x) against 15.2x (8 year median) used previously. i-Sec has also pushed back the investment horizon to March 2010 from Sept 2009 to price in a more prolonged phase of risk aversion and now expect Sensex level of 16050 by then.

If one were to use the median PE on the Sensex target it implies a modest growth of 4% in Sensex earnings over FY09-FY11 (vs. our current expectation of 18%). i-Sec believes that rapid monetary easing by central banks all over the world which has begun would catalyse the next global growth cycle and increase appetite for risk over the next 18 months leading us to have a positive view on the market.

i-Sec is Underweight on Oil & gas driven by risk to refining and petrochemical margins, Underweight on IT Services driven by likely reversal in rupee, volume, pricing and margin pressures from deeper-than-expected slowdown. Underweight on Capital Goods driven by valuations, risk to P/E and EPS from lower order inflow growth from Infrastructure and Commodities sectors.

Overweight on Consumer sector driven by steady earnings prospects and possibility of surprises from lower soft commodity prices. Overweight on Telecom.

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