Sensex targets go off target

SPECIAL REPORT

What a difference a few days can make. All those analysts who were generally going gaga over the India story for much of the past 12 months have suddenly decided to sing a different tune.

One would think that ratings on a fundamentally good story such as India's - as analysts would have us believe - are in no immediate danger of being revised downwards.

But that is exactly what has happened in the past few weeks, with both domestic and some foreign brokerages deciding that may be Indian markets are not shining enough.

Sensex levels of 7,000 were a distinct possibility till only a few weeks ago, to those in the know. Now the same people are revising their yearly estimates downwards and in some pessimistic estimates to even below 5,000 levels. Call it the law of moving average estimates.

The change in government at the Centre and fears about a possible slowing down of reforms have been touted as the main reason for the current doubt.

So that brings us to the key question: Is the current revision all about the change in central government and a possible backtracking on some key economic policy issues or is there more to it than meets the eye? Certainly it is not all about political changes.

It was sheer coincidence that apart from the surprising election results, markets also had to deal with external factors like rising oil prices, slowing Chinese demand and a possible rise in interest rates. So, what does the future hold for Indian markets?

Some are losing hope...
One thing is for sure - nobody now believes that it will be smooth traffic as usual vis-à-vis the 12 months prior to the elections. Most brokerage houses are concerned about policy directions and are looking forward to the Budget which will be presented in early July.

The sense of concern is evident in the fact that top research houses have revised their Sensex targets downwards. Leading foreign brokerage houses like Morgan Stanley have gone underweight on India from their earlier overweight positions.

"While the political dynamics are indeed disappointing, we are more concerned with the weakening in the rupee/dollar rate and the likelihood that rising rates will follow in India," says a recent Morgan Stanley strategy report.

Citigroup is also not enamoured by the Indian future, preferring to be cautious. "We get cautious on the Indian market after election results," notes a recent report by Citigroup Smith Barney, a division of Citigroup Global Markets.

Though the firm expressed hope that the market's initial reaction - as highlighted by the blood bath at the bourses on 'Black Monday' - may not last, it was quick to point out that political power shifts are a cause for worry.

"While Congress has a good record on reforms, its dependence on Left would raise questions on tough measures."

The outlook by domestic brokerage houses is not too optimistic either. According to S Naren, head of research at domestic securities firm Refco Sify, the firm will be pushing down its Sensex target soon.

"We have our worries on whether the strategic divestment of PSUs will go through. Rising oil prices are also a cause for uneasiness. We were hoping for a cut in interest rates in schemes for high net-worth individuals (HNIs) like relief bonds. Now it is unlikely to happen," Naren says.

...others prefer to wait and watch...
There are others who prefer to wait. Another large foreign brokerage house with an India presence, CLSA Asia Pacific Markets, is one of them, choosing to wait for more clarity to emerge on the policy front.

According to a CLSA report, uncertainty on economic policy will keep markets range-bound in the near-term. "We will revisit our December 2004 Sensex target of 6,400 based on policy direction that emerges from the Budget," says the report.

Given the mood, implications of the Budget will be critical. "We will have to see the direction of economic policy that is bound to emerge post-Budget," says an analyst with a domestic securities firm.

..while for some India is still shining
Even amidst the general pall of gloom, there are those for whom the Indian markets are still shining. Domestic firm SSKI, for example. The firm has pegged its 12-month Sensex target at 6,200.

Although SSKI expects uncertainty to prevail till the Budget, its recommendation is to build long positions in the ongoing correction. Jamshed Desai, head of research, IL&FS Investmart, is also "cautiously positive" on Indian markets.

"I feel we are in a bottoming-out process. The markets could see another 500 points drop from current levels, but then could move up from there."

Domestic securities firm Khandwala Securities, too, prefers to be positive. As per a report by the firm, it is still worthwhile to "buy and hold" stocks in the long term when the markets slide to more attractive valuations.

As for the short-term, the advice is to book profits by selling on highs. "BSE Sensex should hover in a range of 5000-6000 points for some more time," says the report.

Research houses' revised Sensex target
Firm	Pre-elections	Post-elections
Citigroup	6,600	5,800
CLSA Asia Pacific	6,400	To be revisited
DSP Merrill Lynch	7,000	Below 5,000
Enam Securities	7,000	5,000-6,500
HDFC Securities	6,500	No change
Kotak Securities	6,200	5,600-5,700
Morgan Stanley	Overweight	Underweight
Refco-Sify	6,600	Being lowered
SSKI	7,000	6,200
UBS Warburg	7,240	6,275

The consensus is that the key for India's growth will be the direction and pace of the reform process as well as the monsoon. That may be easier said than done. According to analysts, the rate at which FIIs are moving their money out of the country and other emerging markets is a big concern.

There are also worries that FIIs, who were hard sold on disinvestment, might just decide to pack up their bags and look elsewhere for fresh stories. On the contrary, Desai feels that FII outflows are only a short-term blip.

So what is a realistic evaluation of Indian markets? Your guess is as good as ours. If stock markets are notorious for their unpredictability, analysts are famous for their 'moving average estimates'. The dilemma is best exemplified in the words of a head of research at a domestic brokerage.

"Whenever we say the markets will go up, it comes down and vice versa. I think it is best to desist from making any estimates of index movements!"

Amid worries that ...

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• The new government may go slow on economic reforms
• FIIs are moving out of India and other emerging markets
• Oil prices are on the rise
• Interest rates might start go up

...there is good news

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• India is still a fundamentally good story
• Markets may be bottoming out
• Government has allayed fears about reforms