Post the election rally last year when all cyclical and midcap stocks had rallied, there has been a reality check and once again there is a preference for quality companies, which are aligned to the evolving macros. So companies in commoditised sectors where there is global over-supply will remain in the negative list for us. On the other hand, we continue to like defensive sectors like IT and pharma where Indian companies have strong competitive advantages on a global scale; within these sectors, we prefer those companies where margins have scope to improve relative to peers, which is not being factored in valuations currently.
From a bottom-up perspective, we continue to like select emerging midcap companies with strong brands, entrepreneurial success and healthy growth outlook. Overall, we expect the Sensex EPS to report a growth of ~11% in FY2016 and 17% in FY2017, with an upward bias. Attributing an 18x multiple to our FY2017E Sensex EPS, we arrive at a target of 31,500 for the Sensex, implying a 16% upside from the present levels with a 12-18 month horizon.
