UBS sets Sensex target at 20,000

India's Bombay Stock Exchange Sensitive Index may rise to 20,000 by March 2011, helped by a recovery in the economy and company earnings, UBS AG said.

UBS set the new target as it estimates earnings will grow by 21 percent in the year ending March 2012 and expects the index to trade at 14.9 times 2012 earnings. The Sensex gained 64 percent this year.

“Despite the rally in the Indian markets, we believe fundamentals and liquidity are likely to support higher valuations,” Suresh Mahadevan, an analyst at UBS said in a note to clients. UBS expects stocks to “re-rate” further on positive data relating to industrial production, gross domestic product and quarterly earnings. UBS forecasts earnings of the 30 stocks in the Sensex will increase 4 percent in the year ending March 31 and 22 percent the following year. UBS added Tata Steel and JSW Steel to its model portfolio because of the positive outlook for the Indian steel industry, Mahadevan said in the note. UBS has turned “overweight” on the power industry while maintaining an “overweight” rating on real-estate and information technology. The brokerage reduced its weightage on automobiles, telecommunications, banks and consumer companies as it expects these industries to under-perform on concerns that monsoon rainfall will be insufficient to sustain farm output.

The authors are Bloomberg News columnists. The opinions expressed are their own