Why Ambit Capital Expects Sensex to Hit 25,500 Soon

The journey of Sensex so far this year has been very volatile to say the least. It hit new highs above 30,000 in March before falling to nearly 8-month lows of 27,300 levels earlier this month.

Now, brace for more volatility. The Sensex could touch 25,500 levels in the next three to four months as earnings growth is likely to disappoint, says Ambit Capital.

Saurabh Mukherjea, CEO-Institutional Equities at Ambit Capital, told NDTV that the current valuation of Sensex is built upon the assumption that earnings of Sensex companies will grow at 16-17 per cent in the current fiscal. (Watch interview)

Instead, Sensex earnings growth is likely to be 9-10 per cent in the FY16, due to which Sensex may correct 7-8 per cent from the present 27,800 levels, he said.

Mr Mukherjea said that Indian economy is in the midst of a "major macro-economic transition" which will bring in some pain in the short term.

"What is happening is we are going through proper structural reform, we are moving from being high inflation, high subsidy, high corruption, high black economy to one where all of these are lower, making a major macro-economic transition. These transitions are never painless. We are feeling the pain at the moment, the pain is going to be more acute over the next three-four months," said Mr Mukherjea.

The government is trying to bring a structural change in the Indian economy by bringing down subsidies, lowering inflation and cracking down the black economy, which is going to have a long-term positive impact on the economy but will bring near-term pain for the economy, he added.

The economy has already started showing some of the signs of the pain of this transition process, said Mr Mukherjea. "Rural wage growth at a decade low...new project launches in the real estate sector is similar to the three/four months after the Lehman Brothers crisis, which was pretty low," added Mr Mukherjea.

However, Ambit believes that these structural changes will bear fruit in FY17, when the economy will see a "real growth".

"Inflation will settle at sub-5 per cent levels next year which will lead to higher-than-expected rate cut and boost manufacturing growth," said Mr Mukherjea.