Markets heading towards a new all time high... - Edelweiss

S&P CNX Nifty has been consolidating in the 5600-5800 range we highlighted in our previous report. However, we believe this round of consolidation will soon come to an end and the Nifty will break-out on the upside. We see Indian markets hitting new all-time highs in the next 3 to 6 months.

As per RBI's guidance, rate cuts could resume in the first quarter of 2013 - most likely in January itself. The global situation appears to be stabilizing while the domestic industrial cycle should also gather some steam soon. Thus, we see rate-sensitive cyclicals and industrial cyclicals doing well over the next few months. On the other hand, we continue to be buyers of consumer-centric companies. Our top picks are appended at the end of the note.

Technically, we are nearing a break-out to all time high levels

According to current technical setup, the Nifty has formed a decisive low at 5580 post the RBI policy meet on Oct. 30. The index has been consolidating between 5550 and 5720 since mid-September. During this period, it has formed a sideways pennant, which has given a breakout on Friday (Nov. 2). This has a measured move target till 6000. However, the index is in the process of forming a higher high, higher low pattern, depicting typical bull market characteristics. We expect the Nifty to gradually move towards new all-time highs from the current levels over the next few months.

Key levels to watch -

- 5750 for a breakout confirmation and 5860 as trend continuation.
- 6118 for first level of resistance and consolidation.
- On the lower end, 5580 - 5540 will be key support levels. Dips to these levels will give an all out buying opportunity.
- 5445 breakdown is the risk level below which traders should review this analysis.

Rate cut cycle to resume from January, 2013

On the fundamental side, the RBI in its latest policy meet has guided for the resumption of the rate cut cycle in January 2013, as inflation pressures come off. We believe that the CRR cuts announced recently have improved banks' liquidity position and yields. Therefore, banks have passed on the same to the borrowers in the form of slightly lower rates. Lower rates are already a reality at the borrower level while another 50bps or so could materialize beginning January. The industrial cycle has been stunted over the last 9 months, with IIP growth averaging just 0.5% over this period. We expect the capex cycle to pick up soon.

Valuations supportive of higher levels

At the current levels, the Sensex trades at a PE multiple of 15.1x FY13E EPS of INR 1260 and 13.3x FY14E EPS of 1430. Historically, Indian markets have traded at valuations of 15.5x one-year forward. Assigning the average multiple of 15.5x, we arrive at a March 2013 target of 22,000 for the Sensex, or 6800 on the Nifty, an upside of 18% from the current levels.

Source : Equity Bulls

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