CLSA cuts Sensex year-end target by 3% to 28,500

Citibank, UBS and HSBC have earlier revised downward their forecast on the Indian market

Foreign brokerage CLSA has cut its year-end target for the BSE exchange’s benchmark Sensex index by three per cent to 28,500, on rising concern over delayed pick-up in growth amid a rural slowdown.

“We lower the December 2015 target, based on a forward multiple of 15.5 times the PE (price to earnings ratio) in line with 10 years’ average,” it said in a report. According to it, a meaningful investment cycle pick-up is unlikely in 2015-16.

Prior to this, UBS, Citibank and HSBC had also reduced their targets for Indian stock markets.

The report said, “Meetings in Delhi do not give us comfort on growth pick-up. The prospects of a meaningful economic recovery in the second half of the current financial year are fading and we remain cautious in the near term.”

CLSA’s picks are Bharti Airtel, Maruti Suzuki, Tata Motors, HDFC Bank, Infosys, Sun Pharma and Coal India. It has removed Grasim Industries and JSW Energy from its portfolio and added Zee Entertainment and Coal India.

“Coal production growth recovery is one of the most significant achievements of the government and potential auctioning of linkages can be a further boost to Coal India,” it added.

With an expected deficiency in monsoon rain, CLSA fears the government might re-look at its rural strategy. “The minimum support price for summer crops would be announced in June and if the raise turns out to be eight to 10 per cent, it will likely signal re-thinking within the government and the market could react negatively,” the report said.

It said the road sector had seen some progress but some operational differences between National Highways Authority of India and the ministry of road transport & highways were causing delays. CLSA is also concerned about the growth in core Index of Industrial Production numbers, which have declined to a 10-year low. “Quick revival appears unlikely,” it added.

With RBI signalling that rate cuts are unlikely unless monsoon turns out to be normal and food inflation is under control, there will be impact on public sector banks' ability to lend once credit demand improves given the NPA pressures and weak capital availability.