Religare pegs Sensex Dec 11 target at 24,000

Religare Capital Markets has set a target for Sensex and Nifty at 24,000 and 7,000 respectively for December 2011, indicating a 21% upside from current levels. It expects Sensex profit growth of 21% and 16% respectively over FY11/FY12 with steady 20% ROEs that will sustain 1-year forward P/E multiple of 17x (leading to Sensex target of 24,000).



Key Drivers

1. Strong rural consumption over the next 12 months due to favourable monsoons that would drive above-trend 7% growth in agriculture and have a positive impact on rural disposal incomes;

2. Urban consumption remaining robust on the back of rising disposable incomes, positive demographics and lifestyle changes;

3. A gradual pick-up in the investment cycle in select sectors (like Autos and Textiles) that would drive sector-specific performance;

4. Continued strength in earnings growth and ROEs leading to sustained above-average valuations, especially for a lack of suitable alternatives; and

5. Sustained capital flows in the light of QE2.

Recommendations

Overweight on Consumer sectors-both Discretionary (autos) and Staples-Banks, and Telecom.

Underweight on Diversified Financials, Utilities, Infrastructure/ Construction and Energy.

Neutral on Real Estate, Metals, Cement, Capital Goods, IT Services and Pharmaceuticals.

Top large-cap picks: Bharti Airtel, Hindustan Lever, ITC, Tata Motors, M&M, Tata Steel, State Bank of India and Axis Bank.

Top mid-caps picks: Ashok Leyland, Asian Paints, Dena Bank, Educomp, Voltas, Aurobindo Pharma, Nagarjuna, Oberoi Realty, Petronet, and Sintex.

Key risks to macro thesis

> Global shock leading to capital outflows from emerging markets (including India)

> Sharp rise in commodity prices, especially crude, that would hurt India`s fiscal balances

> Any rise in political risk that would induce fiscal deterioration.