Global brokerage Morgan Stanley’s Ridham Desai has lowered its year-end Sensex target to 62,000 from 70,000 earlier, however, sees the index to rise to 75,000 in its bull case scenario.
Its bull case scenario is based on India’s inclusion in the global bond indices, resulting in near-$20 billion inflows over the subsequent 12 months, COVID-19 does not resurge, oil retraces its recent rise quickly and the Reserve Bank of India (RBI) remains dovish for longer, and earnings growth compounds 25% annually over F2022-24.
Meanwhile, its base case scenario of 62,000 is based on assumptions that the ongoing Ukraine-Russia tensions ends in weeks, future COVID-19 waves will not result in a major restriction of economic activity and a recovery in growth as per Morgan Stanley’s forecasts. “Government policy remains supportive and the RBI undertakes a calibrated exit. Sensex earnings compound 22% annually over F2022-24.”
“Our revised BSE Sensex target of 62,000 implies upside potential of 16% to December 2022. This level means that the BSE Sensex will trade at a trailing P/E multiple of 25x, ahead of the 25-year average of 20x. The premium over the historical average reflects a higher confidence in the medium-term growth cycle in India,” he said in the note.
Indian equities have so far resisted the rise in oil prices. While the template remains one of high volatility and modest equity returns, at the portfolio level Morgan Stanley recommends a shift to a barbell strategy with wider sector positions.
“Indian stocks have held up remarkably well despite the rise in oil prices, possibly due to a combination of a change in macro funding mix to FDI, falling oil intensity in GDP, high real relative policy rates and a strong domestic bid on stocks. That said, the length of the military action in Ukraine could determine its impact on earnings and multiples,” the note added.