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HSBC Securities sees Sensex at 19,300 by year-end

Says valuations support positive call GAAR a key risk

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has set an year-end target of 19,300, citing slowing momentum of earnings cuts, and favourable valuations.

The foreign brokerage’s target implies a 12.63 per cent upside for the 30-stock benchmark index of the Bombay Stock Exchange (BSE) from its last close of 17,134.25 on Friday.

According to HSBC, the Sensex is trading at about 13.5 times its forward price-to-earnings (PE), below its five-year average of 15.5 times. “This should provide some comfort to investors that the market is not being fuelled by excesses,” said Jitendra Sriram, head of research–India, HSBC Securities, in a strategy note.
 

HSBC POSITIVE ON INDIA
  • At 13.5 times forward PE, Sensex trading below five-year average 
  • Expects to cut rates by another 25 basis points in FY13
  • Foreign flows remain the swing factor for the market

Monetary easing is another positive for Indian stock markets, according to HSBC. The Reserve Bank of India cut its key policy rate by 50 basis points on April 17, the first in three years. HSBC economists expect the central bank to cut rate by another 25 basis points in the financial year ending March 31, 2013. Sriram is positive on the consumption theme, private banks and exporters in India.

Flows remain swing factor
HSBC, which on March 26 upgraded India to ‘overweight’ from ‘neutral’ within the Asia-Pacific, believes flows from foreign investors remain the swing factor for the market, especially in the face of the General Anti-Avoidance Rule (GAAR).

“India’s balance of payments makes it vulnerable to capital flows. The new General Anti-Avoidance Rule set to pass with the Union Budget in May proposes taxing outflows of capital routed via tax havens – a key risk for the market,” Sriram said. “FII trading volumes crashed following the finance minister’s introduction of in the 2012 Indian Budget. In our view, there are aspects of GAAR proposals that could be damaging.”

After pumping in about Rs 44,037 crore into the Indian stock market in the first three months of this year, FIIs have pulled put Rs 777.7 crore this month till April 26, showed Securities and Exchange Board of India (Sebi) data compiled by the BS Research Bureau.

Crude oil prices and global macro are also key headwinds for Indian shares, according to HSBC. “The European Central Bank’s Long-Term Refinancing Operation II seems to have led to an easing of borrowing costs. The US economy is showing signs of improvement and some stabilisation in asset prices,” Sriram said. “However, the situation remains fluid, and any worsening from here could be a drag on economic growth and, thus, forms a downside risk to our forecast target.”

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