MyValueResearch

Will the stock market end the year on a good note?

Now, when everyone is saying that Indian markets are over stretched and are trading on a higher P/E band, the hundred million dollar question is that will our markets be able to end the year on a positive note? At the current mark of 17,000, Sensex is trading at a P/E of 21. While comparing it with the historical average i.e. 16x, it surely looks expensive. But, this is on account of EPS of Sensex and Nifty, which has fallen from March to September quarter despite good profit numbers from some companies, as many companies like Axis bank, Tata Steel, Punj lyyod, Unitech, DLF, Hindalco, Suzlon have diluted their equity in a big way to raise money. That is the reason; both Sensex and Nifty are looking expensive.

Apart from it, we have many factors which ensure consistent capital inflows in India.

FII inflow crosses record Rs 73,441 crore-mark ($15.3 bn)

From January till date, India has recorded Rs 73,441 crore inflows through FII route, the highest ever investment made in rupee terms in a single year. A number of factors including weakening of dollar and a higher rate of return from the emerging markets have attracted the FII investment. Notably, in 2008, FIIs were net sellers of stocks worth Rs 52,900 crore. In the year 2007, stock markets witnessed a record breaking FIIs investment of Rs 71,486 crore. With the government’s talk on disinvestment of stake in state-run companies and the announcement of big infrastructure programmes, India sees FIIs would stay long in the Indian market.

GDP growth

According to the Govt’s CSO, growth in GDP rose to 6.1 % from a year earlier in the April-June quarter. China exceeds India in terms of growth rate, but India is not as dependent on exports as China, which helps India to endure the global economic troubles. Going forward, we expect India to continue to expand in the mid to high single digit growth rates as they take advantage of their growing batch of educated workers.

Large Population

India?s growing population provides a boost to the domestic demand. There is worry that rising raw material costs (due to monsoon) would impact margins of the company. But we expect demand will also go up. In the first half we saw low volumes but lower costs which helped shore margins, so in second half we expect that we could see higher volumes which could offset the higher outgo on raw materials.

30% volume rise in Indian commodity market

This year (till November), Indian commodity future exchange has seen a jump of 30% in volume terms. This can be because of the re-introduction of some commodities like wheat and soya bean. Due to weak monsoon and cyclone, Indian commodity market saw some commodities hitting all time high like Guar seed, Guar gum, Pepper, Jeera and Turmeric. Gold also touched its life time high level on account of RBI?s purchase of gold to increase its reserve and physical demand.

India’s forex investment

India has invested 30% of its foreign investment in US, whereas China and Brazil have invested 50% and 70% of their investment respectively in US.

Industrial output

Industrial output grew 9.1% in September 2009 on Y-o-Y basis. The reason can be low interest rates, which have given confidence to the consumers to borrow to buy vehicles or other factory-made goods. This was also helped by stimulus and festival demand.

Trade deficit gap narrows

India?s trade deficit narrowed to $7.8 bn in the month of September from $8.4 bn in August. Exports continue to decline ? it was down by 13.8% but the good part about this was that it has been the least decline since the downturn began this fiscal. Imports are down by 41% to $31.6 billion in April-September this year, mainly on the back of lower prices of crude. (So, import bill for crude oil came down).

Going forward, according to Indian Export Organisations, India’s exports are expected to touch around $167 billion, almost the same level of last year in FY10. The commerce ministry looks ambitious and optimistic and has come up with foreign trade policy for the next 5 years, whereby; it aims to have an export of $ 200 billion by FY11. This will ultimately improve the declining trend of exports and will give thrust to employment-oriented sector like Textiles and Gem Jewellery.

India on recovery trail

India has emerged as a leader of the nascent worldwide recovery. The stock market has surged more than 76 % this year, emerging as one of the best performers among its peers. Growth in this Asia’s third-largest economy is expected to be 6 to 7% this fiscal year and accelerate in 2010/11, and a rash of companies is raising billions of dollars to fuel expansion.

Strong Government

The re-election of the Congress party-led government in May? 2009 freed India, from having to depend on communist allies, lifting hopes of acceleration in long-delayed financial reforms and infrastructure investment.

India…in a better position

India can be considered as ?balanced? in terms of investment and consumption with savings rate of 35% and consumption of 65% of its GDP. The fastest growing China leans towards investment, whereas the most of the western countries are weighted more towards consumption.

Sustainable rural growth

According to Sunil Duggal (CEO of Dabur India), for the first time last year, rural sales overtook urban areas in select categories ? it was a paradigm shift. But this year also weak monsoons haven?t dampened rural growth.

Q3 earnings

From last 2 quarters, we are seeing strong corporate earnings growth due to the lower costs, which are a direct result of the cost cutting measures deployed by businesses over the last 12 months. With lower interest rates, government spending in rural areas and lower base year, we can expect Q3? 2009 results to be ?revenue driven?. If India Inc. records a strong growth in sales volume, this will be the most concrete indicator of a recovery. Top line growth is not only good for the company and stock market but also for the economy as a whole.

So, these are some of the ?Green Shoots?, which makes India an attractive investment destination for FIIs. So, going forward, keeping in mind the bumps of the stock market, we expect the overall trend is up.