Sensex poised for 23,000? Analysts speculate on fair value

Over 6 per cent slide in the value of the S&P BSE Sensex so far in 2013, as per data till September 3, is making analysts speculate the base case - or what is called the fundamental value of the index. 

So far in the year, the index was largely weighed by a host of factors including uncertain macro-economic environment, depreciating rupee, concerns over US Federal Reserve's winding down of its $85-billion bond-buying program and geo-political concerns. 

Estimates on Sensex are mixed and analysts expect the benchmark index to move in a 5000-point range, from 18000 upto 23000. Morgan Stanley is of the view that earnings growth of Sensex companies are likely to take a hit in FY14 and FY15. 

"We cut our Sensex earnings growth estimates from 10.5% to 4.1% for FY14 and from 19.0% to 12.7% for FY15. We issue a new 12-month forward Sensex target of 18200," Morgan Stanley said in a report. Amid expectations of a slowdown in economic growth, the brokerage has trimmed its broad market earnings growth forecast for FY14 to 6% from 12% and forecast an estimate of 5% for FY15. 

However, the global brokerage firm put a target of above 23000 in a bull market scenario, where earnings growth accelerates to 10 per cent and 15 per cent in FY2014 and FY2015, respectively. With a 15 per cent probability, Sensex can rally towards 23800 in a bull case scenario. 

GDP figures released last week highlighted the fact that annual growth had slipped to 4.4 per cent in the April-June quarter, its weakest pace in four years. The gloom surrounding the Indian economy may deepen in the next three months with rupee expected to weaken and inflation projected to stay high, an ET poll of top-fund managers and brokers shows. 

The rupee may possibly touch 65 to the US dollar by December while inflation is expected to stay at elevated levels of 9 per cent (retail) and 6 per cent (wholesale). The Sensex is expected to hold its current position and may even surprise on the upside, the poll reveals. 

The currency has seen a steep fall against the US Dollar, hittting a record low of 68.85 last week, marking a drop of 20 per cent from the end of 2012. A major overhang on emerging markets, including India, is the US Federal Reserve, which could start slowing its bond purchases by the end of the year. A reversal of flows will put pressure on countries which use hot money to finance current account deficit (CAD). 

With the trend showing signs of reversal, India faces the burgeoning problem of financing current account deficit which the government wants to bring down to $70 billion in the current fiscal year, from $88.2 billion last year. However, the rising cost of crude oil import will continue to put pressure on the CAD. "The market is now trading at a reasonable valuation leaving short-term aberrations aside; there is nothing which prevents the market from trading below fundamentally merited valuation for some period of time," said Jitendra Sriram, Director & Head of Research, HSBC Securities in an interview with ET Now. 

"The QE unwind could make it even more possible that we continue to drift below the fundamental value. However, I would still say that the fundamental value of the index is probably closer to the 20,000 to 21,000 range, rather than where it is today," he added.