BNP Paribas Cuts Sensex Target citing earnings Risk
September 9, 2013
After Citigroup Analysts came and Downgraded India, everybody has jumped into the “Me Too” bandwagon. The liquidity tightening measures adopted by the RBI look set to continue for longer. Concerns about premature tapering by the Fed have led to an environment of low liquidity that seems likely to continue for the foreseeable horizon.
BNP Paribas has now downgraded BSE Sensex target from 21,000 for Dec-2013 to 17,000 citing declining earnings led by domestic cyclicals. We like the way the Author of the report has justified 17,000 Valuations for Dec-2013.
BNP Expects EPS of Rs 1,261 for FY 2014 and Rs 1,403 for FY 2015. They estimate the earnings for Dec-2014 at 1,368 and a forward P/E of 12.38 justifies their earnings at 17,000. This is in-line with our 12.5 forward P/E since Indian Economy offers sub 5% GDP growth and thus high valuations of 15 P/E are unjustified.
How does BNP Paribas Differ from our Approach ?
BNP on a rolling basis is looking forward to 12.5 P/E on the next 4 quarters earnings. We do agree this could be the right methodology but with the BIG EVENT of General Elections overhang, we are expecting the market to Undershoot to 16,000 like it overshoots when the bulls are on a BUYING Spree without looking into the fundamental earnings of the companies.