Market rally overdone for now, time to book profit By MANISHI RAYCHAUDHURI, BNP PARIBAS INDIA The government’s recently-announced reform measures – increases in diesel price, FDI in multi-brand retail, etc – reduce the “tail risks” to the Indian market. Apart from a 0.15% decline in fiscal deficit of GDP for FY13 and some upward pressure on INR, we see limited near-term impact of the government measures. Market concerns about political instability after the withdrawal of support by the Trinamool Congress seem overdone. Even after a TMC withdrawal, the UPA would be left with 254 core members in parliament, and with ‘outside supporters’ it would 311 – well ahead of the halfway mark of 272. Furthermore, even if one of the parties providing outside support – Samajwadi Party, for instance – decides to withdraw support, the government would still be safe! It would still have 288 MPs supporting it, either from within the coalition or outside it. Consequently, we don’t expect any significant rollback of the recently announced measures. The need of the hour is to kick-start the investment cycle. Many projects in the electricity, metals and chemicals (refinery) sectors are stalled because of issues related to environment clearance, land acquisition or fuel supply. The proposed National Investment Board, headed by the prime minister, to fast-track projects above a certain threshold (tentatively INR10bn), could help speed project execution. India has been one of the best performing markets over the past few weeks – outperforming regional peers and the benchmark MSCI AxJ and EM indices. After the recent run-up, the Sensex 12-mth fwd P/E valuation is at 14.1x – just 7% below its long-term average of 15.2x. This, in our view, will be a near-term ceiling given ongoing deleveraging pressures. As such, we retain our year-end Sensex target of 18,500, derived using justified P/BV. At our target, the Sensex would trade at a 1-year forward P/BV of 2.2x and PE of 13.7x. While the recent measures are sentiment positive, we believe their impact on corporate fundamentals will be limited. The recent rally of some stocks was driven both by ‘risk on’ sentiment post easing by G3 central banks and positive sentiment after the flurry of reform announcements. We think the rally is overdone and provides some profit booking opportunities. BNP Paribas analysts highlight the rallies in JSPL, RIL, DLF, SBI and BHEL might lead to short term weakness. Two-wheeler stocks, particularly Hero Motocorp, are also suffering from low retail demand and high inventory, which the market seems to have overlooked.