Morgan Stanley Ups Sensex Target To 33,000 On New $100-Billion M&A Cycle

Brokerage house Morgan Stanley has raised its target for India's benchmark Sensex by 10 percent to 33,000 for December 2017 on expectation of “heightened” merger and acquisition (M&A) activity, which in turn it said, may raise valuations and margins.

“If history is a guide, M&A transactions could scale $100 billion (Rs 6 lakh crore) in the next 12-months,” Morgan Stanley strategists led by Ridham Desai wrote in a note on Tuesday. In a conversation with BloombergQuint's Menaka Doshi on February 3, Desai had predicted a big scale-up in M&A activity.

Also Read: Optimistic On M&A Cycle In India, Ridham Desai Tells BloombergQuint In Post-Budget Interview

Sectors with the least pricing power and/or most distress – banks, steel, infrastructure, cement, property and telecommunications – will be the most favoured for M&A, Morgan Stanley said in its note.

Indian equities have come a long way after the selloff in November of last year, triggered by a surprise U.S. presidential election outcome and an unprecedented cash ban that rendered 86 percent of the country's cash useless.

The S&P BSE Sensex has risen 9.5 percent year-to-date, and a target of 33,000 represents a 14.8 percent upside from Tuesday's close.

Morgan Stanley is banking on earnings revisions in the coming six months as one of the key triggers for the target upgrade. “We lift our earnings growth estimates for FY19 from 15 percent to 24 percent,” Morgan Stanley notes.

Interestingly, the current market valuations has been a key bone of contention for analysts however, for Desai and team they “look reasonable” when compared to history, emerging markets and bonds.

The brokerage house recommends buying financials, including property, steel, infrastructure, cement and telecommunication stocks. These sectors may lead the next wave of consolidation, the brokerage said.