Dalal Street Investments

Indian Equity Valuations to Contract Reflecting Lower GDP Growth – Sensex Target

August 28, 2013

Citigroup Equity Analysts were the first to come out and boldly question Why Indian Equities which are already overvalued compared to Emerging Economies must Trade at a higher P/E of 14 when the Policy Paralyzed and Lip Service Government is delivering the Worst GDP Growth of Decade ?

Today, JP Morgan Analysts have seconded Citi Opinion in a research report released just a while ago. Their valuation model suggests that there could be downside of another 5-7% before value begins to emerge. Their model suggests a 12-month forward PE multiple of 12-13x if GDP growth were to remain at 5%-6% over a two–three-year time period. Relative to peer group in EM, particularly the BRICs group, Indian equities continue to sustain a healthy premium of about 30%. Indian equities likely deserve to trade at a premium to EM for structural factors. But, we believe current valuation premia leaves no scope for expansion.

Have a look at the BSE SENSEX EPS Chart between FY2013-15 [Expectations]

How to interpret the above Chart ?
FY2013 Reported SENSEX is 1190 [I thought it was 1170] Anyway, lets assume 1190 for the purpose of Calculation. If SENSEX Companies EPS Grows at 10% YoY for FY2014-14 & FY2014-15 then FY15 SENSEX EPS will be 1,440. 1440 * 12x = 17,279 becomes FY 15 Sensex Target.

For FY 2013-14, SENSEX EPS will be Rs 1309 * 12x = 15,708 [~16,000 the Target we set as the Magic Number]

With the overhang of Elections and Supreme Court not letting the Thugs in the Government to Loot the Natural Resources of India [Spectrum, Mines, Land etc] we also expect a phase of sub 5% GDP Growth for India until Sanity returns to our Dirty & Arrogant Politicians.


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