Since the recent peak for the BSE Sensex and the S&P CNX Nifty (21,108/ 6,348 on November 5), there has been a correction of over 10 per cent due to a mix of concerns -- the conflict in Korea, the 2G licence scandal and the bribe-for-loans scam involving banks and realty sector stocks.
The coming year is expected to generate 10-20 per cent returns for investors, though the stock markets will not rise as sharply as they did in the calendar year of 2009. The return in 2009 was the best since 1991, with benchmark indices rising over 80 per cent. The return so far in the current calendar year has been around 14 per cent, considerably lower than other asset classes, such as gold, which appreciated by 26 per cent, and silver, which was up 74 per cent.
While gold had maintained the earlier rate of return, it increased for silver, from 48 per cent in CY09. Among other commodities, crude oil, nickel and copper appreciated 20-35 per cent, more than the benchmark indices.
The 10-20 per cent expected returns from the benchmark indices has been on the back of an expected 20-plus per cent growth in net profit of Sensex companies, based on research reports available in November-December. Among Sensex and Nifty companies, automobiles, banks, capital goods, information technology, oil, power and pharmaceuticals would post robust growth in 2010-11 and 2011-12.
Cement, construction, metals and fast moving consumer goods companies are expected to show moderate growth. Telecom will underperform, indicate almost all analysts from foreign and Indian broking houses.
Interestingly, the growth in Sensex earnings in 2010-11 will be driven by Index heavyweights. Larsen & Toubro, State Bank of India, Tata Steel and Tata Motors are posting net profit growth of over 30 per cent. Thanks to acquisitions abroad, net profit growth is expected to be robust for Tata Motors and Tata Steel. Cement and telecom will drag down the aggregate earnings growth, while the recent rise in cost of deposits by banks are likely to hurt the margins and earnings growth for that sector.
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Estimates
Based on the current price/earnings (P/E) multiple and expected earnings growth for 2011-12, the Sensex is expected to move above 23,500 by the end of the next calendar year. According to the market analyst at CLSA, the market will remain volatile through the first quarter of 2011. The tightness in domestic liquidity and hardening in commodity prices may be short-lived, but this has ended the ‘Goldilocks’ scenario that prevailed for most of 2010.
Citigroup Global Research expects 2011 should provide about 15 per cent return, with a Sensex at 22,000. However, the market is expected to be more of a bottom-up than a top-down year, with less of the mid/small cap bias of 2010. The performance is likely to be driven by net earnings, expected to see 19 per cent growth for 2011-12 for Sensex companies. The market analyst at Religare set a December 2011 Sensex target of 24,000 and 7,000 for the Nifty, indicating a 21 per cent upside from current levels. The analyst believes the market would continue to grind upwards for the medium term.
Vikash Khemani, managing director, institutional sales, Edelweiss Capital, indicates 15 per cent returns from the equities market in 2011. Inflation and tightening of monetary policy may keep the equity market range-bound. Vibhav Kapoor, group chief investment officer, IL&FS, is hinting at a Sensex level of 23,000-24,000 in 2011. Inflation and increases in crude oil prices will result in rising interest rates. The higher cost of funds would then hurt corporate earnings.
The market valuation in terms of P/E multiple has discounted the two-year forward earnings of 15, if one expects the 21 per cent earnings growth in index stocks in the next two years. At 20,000, the 30-scrip BSE Sensex is trading at a P/E multiple of over 20, based on the trailing 12-months net profit for September. The Nifty is trading slightly lower, at around 20. The P/E ratio is expected to come down to around 18.1 for Sensex and 17.6 in the case of Nifty, based on the basis of the estimated net profit for 2010-11.
Both benchmark indices will be trading at around the historical P/E of 15 by the end of 2011-12, as foreign and domestic equity analysts expect India Inc’s net profit to grow at 20 per cent annually in the next two years.