Ambit Cuts Sensex Target to 34,000, Bets on PI Industries, Torrent Pharma

Ambit Capital has cut its Sensex target for the end of FY16 to 34,000 from 36,000. Saurabh Mukherjea, CEO (Institutional Equities) at Ambit Capital, attributed the cut to falling rural consumption and lower-than-expected capital spending, which he says will impact the GDP growth and earnings growth of Sensex companies. (Watch)

Mr Mukherjea said that government has frozen subsidies in absolute terms, which has resulted in flat growth in subsidies, as compared to nearly 20 per cent annual growth during the 10 years of UPA regime.

"This is bound to have a dampening effect on consumption, particularly in rural consumption. We are already seeing that playing out," said Mr Mukherjea.

Ambit expects GDP growth in India with be around 7.5 per cent in FY16 as compared to the government's projection of between 8 per cent and 8.5 per cent. "There is considerable room for disappointment on GDP growth and on earnings estimates for the Nifty which are currently running at around 20 per cent," said Mr Mukherjea.

The government's growth projection is based on an anticipated pickup in capital expenditure in FY16. Ambit however, sees capex heavy sector like metals, mining, oil & gas, power and infra not doing heavy capital spending over the next couple of years.

Cyclical stocks, which have seen strong run-up in last one year on the expectation that there will be a turnaround in the economy, will see a pullback over next six months, says Ambit.

"Till a year ago we had 100 per cent of our model portfolio in cyclicals. Now we have 70 per cent in cyclicals," said Mr Mukherjea.

Ambit says cement and banks are the two large sectors where earnings will struggle to a far greater extent than what market is expecting. "Even private sector banks will dampen down their loan book growth as credit quality challenges surface," said Mr Mukherjea.

However, Ambit believes sectors like pharma and IT will be able to deliver earnings growth of more than 15 per cent.

Ambit's Stock Picks

PI Industries: The agro-chemical company has considerable earnings visibility going into a difficult FY16, says Ambit. "As the government pushes back on the minimum support price (MSP) rise on wheat and rice, farmers will start switching towards fruits and vegetables and this will be positive for the stock. Also, 60 per cent of its earnings come from exports," said Ambit

Torrent Pharma: Ambit sees good earnings momentum for the pharma company. "The change in management two-three years ago has yielded results in the context of difficult year. We expect FY16 earnings to grow at over 20 per cent," Ambit said