Reforms-happy Foreign Banks See Sensex Hitting 20K by Dec

Govt's aggressive reform push along with higher FII flows spur MNC banks to reset India targets

 Leading foreign banks including Morgan Stanley, Deutsche and Citi have raised their targets for the benchmark Sensex encouraged by the slew of economic reforms initiated by a rejuvenated UPA government and the prospect of more foreign fund inflows aided by further easing of monetary policy by the US Federal Reserve. 

Morgan Stanley raised its Sensex target for December 2013 to 23,069, implying a 25% upside from Monday's close of 18,542. The bank, in a client note on Monday said the decisive policy action at home — reduction in fuel subsidies and opening up of retail and aviation sectors to foreign direct investments — and, more crucially, concerted action by European and US central banks have reduced India's tail risk linked to poor macro stability. 
"Conditions for a new bull market are getting slowly satisfied," said Morgan Stanley analysts led by Ridham Desai in the client note. "The yield curve has stopped flattening, liquidity is improving, valuations appear supportive and profit margin expansion is a growing possibility in the coming months. The market is likely to form a new base with positive developments on domestic policy," they said. 
Deutsche Bank raised its December 2012 target for the Sensex to 20,000, while Citi raised its index target to 19,900 for June 2013 against its previous target of 18,400 for the calendar year end. "The timing of India's announcements has propitiously combined with the positive announcements from Europe and US central bankers, and will ensure that India does not miss out on the ongoing global risk rally," said Deutsche analysts Abhay Laijawala and Abhishek Saraf in a note to clients on Monday. At 20,000, the Sensex would trade at a oneyear price to earnings multiple of 14.8 times, an 8% discount to Deutsche's past five-year trading average, they said. 
Citi said Indian stocks will trade at lower multiples than historical averages because of growth concerns and challenges involving political decision-making. "We expect the market to perk up immediately on sheer and primarily foreign flows: a mix of fairly real policy change, global liquidity (QE3-quantitative easing-3), and yes – fairly substantial outperformance YTD (year to date)," said Citi analysts Aditya Narain and Jitender Tokas in a client note on Monday. 
While cheering the recent government announcements such as the increase in diesel prices and opening up of the multi-brand retail sector to foreign giants, these banks warn these steps may not be enough to sustain the recent market strength. 
"It will not be a one-way street for Indian equity markets," said Deutsche Bank. "While the measures are certainly positive and indeed encouraging, the sustainability of the rally after the initial strong velocity will be driven by a combination of factors ranging from the way government handles a belligerent opposition, a possible monetary loosening, the ultimate outcome of the coal allocation controversy, deteriorating asset quality of Indian banks and SEB reforms," it said. Deutsche also warned about the possibility of some populist measures next year in the run-up to the general elections in 2014. 
The government will need to follow up the recent moves with more measures such as land acquisition bill and GST, said UBS Securities, which said it has turned 'tactically bullish' on Indian stocks. 
CLSA said the scope for stock upsides from here is limited as the Sensex has risen 15% in the past three months. "While India is the best play on the global risk-on/off trade, the recent experience shows that the positive initial impact of QE on Indian market tends to reverse later," said CLSA analysts .