UBS expects Sensex to touch 15,000

UBS Investment Research, a global equity research firm, has raised Sensex target to 15,000 for 2007. The increase in target is driven by more supportive outlook on valuations.

UBS has enhanced its one year forward P/E target to 16.5 from 15.4 earlier, as investor confidence in India's growth is likely to sustain, though valuations appear stretched.

UBS believes the likely drivers of the market in 2007 will be stable growth in global soft landing environment, forthcoming investments, margin expansion in finished goods due to raw material price decline and strengthening of the Indian rupee.

The only blemish to India's growth story would be monetary tightening and large equity issue in the pipeline, it said.

"The better performing sectors will be engineering, pharma, cement, IT and FMCG. Banks and the energy sector are likely to under perform," the company said.

Due to growing concerns over the world economy, UBS has underweighed global commodities like metals and energy and overweighed users of commodities like engineering and FMCG.

UBS has targeted a Sensex level of 15,463, which implies that there will be 11 per cent return from current levels for the Indian market, as compared to outlook of 13 per cent return from Asian equity markets.

Metals are expected to give 53.1 per cent returns and the FMCG sector is likely to post 45.4 per cent returns. Among other sectors, auto (+29.8 per cent), diversified (+23.9 per cent) and pharmaceuticals (+22.3 per cent) would be major growth drivers, it predicted.

The firm's expectation of 11 per cent growth in Sensex in 2007 is based on corporate earnings forecast of 19 per cent in financial year 2008, down from earnings growth of 25-40 per cent registered between 2003-04 and 2006-07(E).

A slowdown from FY07 is predicated on the high base created over the last 4 years and the possibility of a slump in consumption due to an expected rise in interest rates.

UBS expects earnings growth of 33.4 per cent in Sensex stocks in financial year 2007. It predicts that strong earnings in 2007 are likely to be from telecom (+146 per cent), cement (125 per cent), pharmaceuticals (+103 per cent) and diversified (+73 per cent) sectors. Power (+7 per cent), petrochemicals (11 per cent), banks and FMCG (19 per cent each) would be modest growth drivers, it said.

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PREDICTIONS FOR 2007

UBS believes the likely drivers of the market in 2007 would be stable growth in global economy, forthcoming investments, margin expansion in finished goods and strengthening of the Indian rupee

It predicts that strong earnings in 2007 are likely to be from telecom (+146 per cent), cement (125 per cent), pharmaceuticals (+103 per cent)
and diversified (+73 per cent) sectors

The better performing sectors will be engineering, pharma, cement, IT and FMCG, while banks and the energy sector will under perform, according to the firm

The only blemish to India's growth story would be monetary tightening and large equity issue in the pipeline, it said