Mumbai: Credit Suisse director and head (research) Nilesh Jasani sees the Bombay Stock Exchange’s benchmark Sensex at 17,000 in one year. However, he was quick to caution that the market is not cheap and liquidity is running it up. “The market will see corrections on the way. The Reserve Bank may start withdrawing liquidity in October-November and the market could see 15-20% correction once liquidity dries.”
Speaking on the road ahead for the market, Jasani says the index can go to 21,000-22,000 if FY12 earnings per share (EPS) rises to Rs1,400. “However, we would need reforms for an FY12 EPS of Rs1,400.” He added that 13,000 is not a durable bottom and could be breached.
On the glut of fund-raising by Indian companies, he says India is raising low-cost equity at high valuations. “Equity raising is compensating lack of debt raising.”
Edited excerpts from an exclusive interview.
You have raised your Sensex target recently from the earlier 13,500 to 17,000. Could you take us through why or what warranted that change?
Bullish note: Credit Suisse director and head (research) Nilesh Jasani.
Let us start with the fact that the markets are not cheap. 17,000 is something that is possible in the near-term, but more importantly it is going to be possible in the next 12 months. The main reason behind that is the liquidity support that is being provided to the market.
There is global reflation going on, with no signs that it is going to be pulled back any time soon. In India, increasingly we realize that the amount of support that the Reserve Bank of India (RBI) is giving to the economy and the market is absolutely amazing.
We no longer have cash reserve ratio (CRR) cuts and that is absolutely right. But the amount of money that is coming into the system almost every month, because of open market operations or sterilization bond conversion, is almost equivalent to 50 basis points cut in CRR every month, which is huge.
It is interesting that you say the market could go to 17,000 even in the near term, but your one-year target is nearly 17,000. Does it mean you think this momentum can carry us a bit higher in the near term, but even in the medium term valuations will keep it capped around those levels?
I think beyond the first two-three months when RBI’s open market operations will keep providing liquidity support, we are definitely going to go through a period when liquidity won’t be a positive, but a negative driver for the economy. Somewhere around October-November onwards, there could be a few months when RBI would start withdrawing liquidity and the market will get concerned about inflation, the bond market could get concerned about fiscal deficits, and there could be impacts on bond yields, deposit rates and interest rates. There could be a period where we have 15-20% pullbacks.
The return to 17,000 and beyond around February-March next year will not be exactly on liquidity, but more so on fundamentals and growth in earnings momentum. Industrial production for a brief while might even be ahead of 10%. People could again start talking about gross domestic product growth in access of 8%.
We could start talking about earnings or return on equity (RoE) returning to levels seen in 2007, which means that it would be a totally different kind of Sensex earnings than what is being forecast now.
What are you taking as a best-case scenario for earnings? What happens in the next two quarters till the end of this fiscal year and what happens more importantly next year, that is, fiscal year 2010-11?
Fiscal year 2010-11 is the more important one. At the moment, analysts in Credit Suisse are predicting a Sensex EPS of around Rs1,080-1,100, which is equivalent to 18% RoE for the market. At the peak in 2007 or FY2008, we had a RoE peak of around 21-22%. So, once again if we start forecasting a similar level of RoE, then clearly we are talking about Sensex EPS going close to Rs1,250.
That is in the next year—fiscal 2011?
Yes, that is in fiscal year 2011. (A lot) will depend on what happens in the global economy as well as our economy in the first half of 2011 or FY11.
Do you think that earnings have bottomed out and we have now started embarking on a new upgrade cycle, which will take us through the next many quarters?
I think you are absolutely right. Even at Credit Suisse and everywhere—not just in India, but around the world—we are witnessing the same thing, that analysts are upgrading earnings numbers and economists are upgrading economic forecasts. We are in an upgrade cycle. All of us are positively surprised the way the reflationary policies of the world have worked not just fiscal, but more importantly monetary policies, the way it has caused reduction in the cost of risk capital for companies.
Do you think the market has hit a durable bottom now than at about 13,000 kind of levels on the Sensex, where we turned from in this last correction?
I think 13,000 may be breached. Forget about global risks, even in the local economy, there are two-three things that we have to watch out for.
Monsoon is one. It remains a risk. Even if we take out the monsoon, the reality is that at some point around January-February next year, we will have economic series that will look like this:
Wholesale Price Index likely in excess of 6-7%, Consumer Price Index likely in excess of 6-7%, and industrial production probably in excess of 10%. In that kind of environment, chances are that central bank’s tone is going to be totally different from the one now. Expectations will have to change in terms of monetary policy and monetary tightening, the market could undershoot also. I won’t say 13,000 is a durable bottom. We may undershoot for a while, but we have fundamental underpinning to come back pretty quickly.
Your target is bullish, but you sound quite like a reluctant bull. Is something making you sceptical about the fact that this might be an outright bull market?
To me an outright bull market is possibly a market where you have valuations still below average. The market is pricing in more positives than negatives. I think the market will go up, but there could be corrections along the way.
What to your mind could lead the earning surprises or upgrade surprises?
The earnings surprises will be essentially led by three-four sectors.
The first sector is going to be companies that are improving their balance sheet fundamentals at the moment, the companies that are raising money and reducing their financial leverage, reducing their interest cost and doing more activities. A lot of them are in construction space, a lot of them are in the real estate space.
The second kind of companies that will provide earnings surprises are companies that are going to be doing some sort of activities with their assets. Once again it would be related to fund-raising, but they would be booking a lot of extraordinary income as they list some of their power assets or things like that.
The other earnings surprises eventually will come from returning loan growth for the banking sector, private sector banks in particular. Engineering goods and infrastructure companies will definitely benefit from a lot of money that is raised by all these infrastructure companies, which are starting implementation of projects.
So, infrastructure, real estate, banks, construction and commodities will be the main sectors that will lead earnings surprises.