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Stock Recommendations for October 2016

Special Report | Published on Oct 17th 2016

IT

The G-sec bond yields have fallen to multi-year low after recent repo rate cut by RBI. The Indian macros have improved strongly in the last two years. With normal monsoon and easing inflation, RBI’s, move indicates that this would be the right time to adopt low yield regime conducive for growth. The consumption-led earning growth will be a potent theme in the markets in near term, with focus remaining on sectors like Automobiles, retail banking, consumer durables, etc. We believe that market would remain attractive over its earning potential going ahead. Low bond yield, boon for economy The previous low yield regime (2002-04), led to a GDP growth of by 8-9%. This sparked a strong pick-up in Sensex earnings and a multiyear bull rally in stock markets from 2002 to 2007. We believe that the Indian economy has gathered enough momentum for growth with lower inflation and interest rates. With food inflation expected to cool down further, we believe that more rate cuts will be a reality going forward. In-line with the earlier instance of low yield, we opine that this regime is expected to show a strong growth in economy and equity markets. Consumption remains the strong theme India’s consumption story remains intact and there is ample scope of growth going forward. Due to normal monsoon this year, the rural consumption is expected to improve in near term, which will be beneficial to overall growth of the economy. As pointers, this consumption is already reflected in retail loans, vehicle sales, etc. This strong momentum in consumption is expected to translate in higher corporate earnings, which had remained weak in the last two years. Sensex earnings to grow, valuation near 10-year average We believe that Sensex earnings are expected to grow by 14-15%, going forward. We also believe that market will remain attractive over its future earning potential. As the current level, Sensex is trading at 15.8x of FY2018E earnings. As the corporate earnings pick-up and economy gathers momentum, we expect Sensex to reach new heights.

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