Amid lot of concerns raised on Indian equity markets’ valuation after 10 per cent rally in S&P BSE Sensex in 2017 so far, Citi Research remains positive on the medium-term prospects.

It has upped Sensex target to 31,500 for December compared with 30,000 for September. This implies over 7 per cent upside potential for the benchmark index from the current levels.

“Our India Sentiment Indicator remains elevated and implies mid-single-digit returns. We remain constructive on the market medium-term,” it said in a note dated March 22.

Citi is unperturbed by the high valuation of Indian equity markets though it admits that the same is not cheap. “MSCI India trades at a 40 per cent premium to the MSCI emerging markets, not too different from the 36 per cent average premium at which it has traded over the past 10 years,” it pointed out.

Hence, earnings growth is key and is the greatest risk factor for markets, according to the foreign brokerage firm. However at the same time it is optimistic about earnings recovery.

“We think acceleration over FY17E earnings growth (12 per cent expected) is likely. Improvement in financials sector and high commodity prices remain key drivers in FY18,” it said.

The foreign brokerage firm maintains its overweight rating on banks and pharmaceuticals while it remains underweight on information technology and consumer.

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