After JP Morgan, Citigroup, Bofa Merrill its now Morgan Stanley Downgrading SENSEX EPS Estimates and Target for FY 2014 and 2015. Based on the Broad market earnings growth forecast for F2014 to -6% from 12% and introducing an estimate of 5% for F2015. Morgan Stanley [MS] Cut Sensex earnings growth estimates from 10.5% to 4.1% for F2014 and from 19.0% to 12.7% for F2015.
Morgan’s SENSEX Valuation Model
Base Case [50% Probablity] – SENSEX EPS estimate is Rs 1320 and a Target of 18,300. Growth will slow down and expect Sensex earnings growth of 4.1% and 12.7% in F2014 and F2015.
Bull Case [15% Probability] SENSEX EPS estimate is Rs 1395 and a Target of 23,8000
Bear Case [35% Probability] SENSEX EPS estimate is Rs 1268 and a Target of 15,700
The risk of a binary outcome will increase as we approach elections. Again, at this moment, the timing of elections is uncertain and there is an active probability that elections may happen ahead of schedule.
The Broad Market Valuations on the parameter of Market Cap to GDP is already inching close to 2008 levels. The ratio is currently at 56% compared with 52% at the bottom. The key issue is that the market is not offering an adequate risk premium. Essentially the market is attractive on earnings but not attractive versus yields (long or short). To the extent that the debate is in yield land, this makes equities less attractive than what headline valuations suggest.
Our Views In our Opinion the Bear Case estimate is most likely outcome and with No Leadership in place for the World’s Largest Democracy, Equity does not deserve a premium and hence we stick to our SENSEX Target of 16,000.