BNP to Macquarie Scrap Record Sensex Forecasts: Corporate India

India’s equity strategists are abandoning predictions for a record high in the S&P BSE Sensex Index as rising interest rates curb earnings growth.

The benchmark stock gauge will slip 5.5 percent to 19,409 by year-end, according to the average of 11 estimates in a Bloomberg News survey. Just three months ago, forecasters said the Sensex would climb to an all-time high of 21,150. The measure has rallied 15 percent from this year’s low on Aug. 21, versus a 11 percent gain in the MSCI Emerging Markets Index.

BNP Paribas Securities (Asia) Ltd., Macquarie Capital Securities (India) Pvt. and Ambit Capital Pvt. cut their Sensex targets as the Reserve Bank of India unexpectedly increased its benchmark interest rate to stem a record decline in the rupee and curb consumer prices in the world’s second-most populous nation. Strategists reduced their average profit estimate by 4.5 percent as higher borrowing costs threaten to worsen the slowest economic expansion since 2009.

“What we had not anticipated was the extent and pace of rupee depreciation, which has not only raised the cost of capital but also portends sharper earnings cuts than we had foreseen,” Manishi Raychaudhuri, the head of Indian equity research at BNP, said in a phone interview on Oct. 8. He cut his Sensex target to 17,000 from 21,300 on Sept. 4.

Expensive Valuations

Some of this year’s best-performing stocks in the Sensex have climbed to record valuations. Sun Pharmaceutical Industries Ltd., India’s largest drugmaker by market value, surged 70 percent to 27 times estimated profit for the next 12 months, according to data compiled by Bloomberg. Hindustan Unilever Ltd., a Mumbai-based maker of consumer products, is valued at 35 times after a 15 percent gain.

The Sensex is the second-most expensive benchmark equity gauge among the four-largest emerging markets, trading at 14 times estimated earnings. That compares with 19 for Brazil’s Ibovespa, 8.8 for China’s Shanghai Composite Index and 4.5 for the Micex Index in Russia, data compiled by Bloomberg show.

“The market has run up quite sharply,” said Mahesh Nandurkar, a Mumbai-based analyst at CLSA Asia-Pacific Markets, which predicts the Sensex will fall to 19,500 by year-end. “You will see more earnings downgrades as we go ahead and that will cause some downside on the markets.”

Deutsche Bank AG is maintaining its forecast that the Sensex will climb to 21,000 by year-end, a 3.6 percent gain from yesterday’s level and near the record close of 21,004.96 reached in November 2010.

Rajan Policy

Investor sentiment improved after the Reserve Bank of India took steps to stabilize the rupee and the U.S. Federal Reserve unexpectedly maintained its bond-purchase program last month, Deutsche Bank strategists Abhay Laijawala and Abhishek Saraf said in a report dated Oct. 3.

The rupee has strengthened 13 percent from its record low on Aug. 28 as foreign investors bought a net $2.6 billion of stocks, giving RBI Governor Raghuram Rajan scope to roll back liquidity-tightening measures that were aimed at boosting the currency. The central bank cut its marginal standing facility rate for the second time in a month on Oct. 7, to 9 percent from 9.5 percent.

Higher exports have bolstered the outlook for India’s economy, Rajan said in an interview by Mint newspaper aired on Bloomberg TV India on Oct. 8. Overseas shipments increased 11 percent in September after a 13 percent gain the previous month, government data showed this week. Sun Pharmaceuticals got 72 percent of its sales abroad in the year ended March 31.

Reduced Forecasts

While the RBI eased cash curbs earlier than investors had anticipated, policy makers will probably increase the benchmark repurchase rate 1 percentage point to 8.5 percent by the end of March to fight inflation, Goldman Sachs Group Inc. analysts Tushar Poddar and Vishal Vaibhaw wrote in an Oct. 8 report.

The RBI raised the rate by 0.25 percentage point on Sept. 20. Consumer prices in the country of 1.2 billion people rose 9.52 percent in August from a year earlier, the fastest pace among 17 Asia-Pacific economies tracked by Bloomberg. Inflation will remain at 9.5 percent in September, according to the median estimate of 17 analysts in a Bloomberg survey.

India’s 2014 economic growth forecast was cut to 3.8 percent from 5.6 percent by the Washington-based International Monetary Fund on Oct. 8. Gross domestic product expanded 4.4 percent in the three months to June, the weakest pace since the global financial crisis in the first quarter of 2009.

“It will not be a run-away market,” Gaurav Mehta, a strategist at Ambit Capital, said by phone on Oct. 9. Ambit cut its Sensex target to 21,000 from 23,000 on Sept. 5.

‘Not Favorable’

Strategists cut their average per-share earnings estimate for the Sensex to 1,284 rupees for the fiscal year to March 31, from a previous estimate of 1,345 rupees. Infosys Ltd., kicking off the earnings season for the September quarter, today raised its annual sales forecast even as profit missed estimates. The stock closed at its highest level since April 2011.

“Markets move in line with earnings and as of now there’s nothing to suggest there will be a pick up,” said Pankaj Pandey, the head of research at, a unit of India’s second-biggest lender. He has a year-end target of 18,600 for the Sensex. “The risk-reward is not favorable.”

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