The market has rebounded by approximately 8% from recent lows of 7540 to 8150 currently. This was led by the positive surprise from the RBI that announced a repo rate cut of 50 bps to 6.75%. A decline in global commodities aiding government’s fiscal position and corporate P/Ls on a front loaded basis would lead to a pick-up in consumer demand and kick in investment cycle in the latter half. This would benefit both operating as well as financial leverage of corporates and would reap positive earnings.
Though volatility is expected to prevail on the global front as central banks across the globe recalibrate liquidity levels, India, with its higher growth rate and least political instability will continue to remain in a sweet spot among other EMs and continue to attract global investors.
We expect Sensex earnings to grow 13.2% 18.5% in FY16E and FY17E to Rs. 1539 and Rs. 1838, respectively. We assign a P/E of 16.5x on FY17E EPS to arrive at a fair value of 30300 by September 2016 with the Nifty reaching 9100. Hence, in our Diwali 2015 strategy, we recommend investing into quality names that have reasonable growth visibility coupled with strong balance sheets.