Citibank ups Sensex target on stellar March quarter

US-based brokerage sees Sensex touching 28,800 by December end

Global brokerage Citibank on Friday increased its year-end Sensex target by seven per cent to 28,800, following India Inc’s good showing in the March quarter. Its earlier December 2016 target was 27,000 points. The new target implies around 1,957 points, or 7.3 per cent increase in the Sensex in the remaining seven months of the year. The benchmark index, which is up three per cent this year so far, ended at 26,843 on Friday.

At 28,800, the 30-share gauge will be valued at 16 times its estimated earnings for the year 2017-18, said Citi. The MSCI India index has rebounded sharply from this year’s low in mid- February.

“After a 11 per cent rally (MSCI India in the past three months) led by global cues, fourth quarter earnings and decent monsoon forecast, the market trades at about 16.5 times one-year forward – slightly higher than 10-year mean,” said Citigroup analysts Surendra Goyal and Vijit Jain in a note dated June 3.

The analyst-duo remain constructive on the Indian market as domestic macro indicators are showing signs of recovery, Sensex earnings and return on equity (ROE) are expected to improve. Citibank says the recent GDP growth of 7.9 per cent for the March quarter and other most high frequency macro data points have been “encouraging”.

“We continue to monitor the sustainability/pace of the same but directional improvement is visible in the past few months’ data,” Citi wrote in the note.

Also, the positive surprises during the March quarter earnings season have been a boost to the market. “Fourth quarter earnings growth (of BSE 100, ex-financials) was about 18 per cent y-o-y, versus six per cent expectation. Beats have exceeded misses after a while and this should provide comfort on the outlook. Citi expects about 14 per cent Sensex earnings growth in FY17E led by recovery in materials/financials and continued growth in autos, pharma,” Goyal and Jain wrote in the note.

Also, the ROEs of listed companies, which have been on the decline for many years, are improving. “Citi expects ROEs to see improvement in 2016-17 y-o-y on the back of improving margins… Consensus expects India earnings to grow well above most emerging markets with one of the highest ROEs. We believe this should help sustain the overweight investors have on India,” the note said.

Citi, however, says there could be risks to its positive outlook. Among them are outlook for global equities, monsoon, sustainability in the economic recovery and reforms. “Monsoons remain something to monitor although initial forecast are encouraging. Sustainability of macro green shoots still needs to be monitored. Progress on key reforms like GST remains a focus area.”

Among Citi’s top picks are Aurobindo Pharma, Axis Bank, HDFC Bank, M&M and Ultratech.