'Sensex may slip to 13,200 by mid-2012'

Credit Suisse calls EPS estimate of Rs 1,200 fair for FY13, assigns a P/E multiple of 11-12 times.

The Bombay Stock Exchange (BSE) benchmark, Sensex, might fall as much as 20 per cent by the middle of next calendar year, according to foreign brokerage Credit Suisse’s India strategist.

Domestic factors like high inflation, rising interest rates and corporate governance issues have kept investors away from Indian stocks in this year. This, coupled with global concerns like slowdown in the US and the euro zone crisis, has resulted in a drop of 17.71 per cent value for the Sensex in this year so far. The 30-stock index closed at 16,877 on Wednesday.

“Our views on the market are still quite negative,” says Neelkanth Mishra, director-equity research, Credit Suisse Securities (India). “For the overall broader market, we think multiples have more downside. So do earnings,” he told a media briefing.

Mishra, who had set a Sensex target of 16,000 in February this year, now sees the 30-stock index to be in a range of 13,200-14,400 by June-July 2012, as investors will start pricing in FY13 numbers. He considers Sensex earnings-per-share (EPS) estimate of Rs 1,200 “fair” for FY13 and assigns a price-to-earnings (P/E) multiple of 11-12 times to arrive at this range.

“People think that 13-14 times multiple is the fair value for the market. We believe that it is a quite a bit lower. We are actually at the top end of the range that we should be at,” Mishra says. “If you look at the P/E multiples of the market in the past 16-17 years, they are in the range of 9-13 times, with the exception of the information technology boom. Whenever bond yields are 9 per cent or higher, the P/E multiples of the market is 9-13 times,” he adds.

At on Wednesday’s close, the Sensex traded at 14.56 times its estimated earnings for FY12.

Mishra expects the P/E multiple for the Sensex to contract as India’s gross domestic product (GDP) growth slows down. “The P/E multiple in India has a very meaningful corelation with the GDP growth of India. As the GDP growth downshifts, P/E multiples will come down further,” he says.

Credit Suisse economists expect India’s GDP growth to be around six per cent for the next few quarters. “So far, most people assume the downshift is a cyclical one. But, I think a large part of the correction is structural downshift. I don’t think we are on at 8-8.5 per cent trajectory anymore,” adds Mishra.

Mishra likes exporters in the current environment. He counts Tata Consultancy Services and Sun Pharmaceuticals among his top picks.