Aug 13, 2003|
Optimism prevails...and rightly so!
In yet another market related poll last week, we tried to gather a view of what investors felt about investing post the June quarter results of India Inc. and in the backdrop of the current rally being witnessed in the Indian capital markets. Considering the fact that the markets have already rallied about 25% in the last 4 months, the poll results seem to be quite impressive.
As can be seen in the chart above, almost half the people (48%) who participated in the poll indicated that they would buy even at current levels (3,800 then). Their optimism towards the stock markets could have been partly aided by Indian Inc.'s good June quarter results and sound prospects going forward. Out of the remaining, 24% voted that they would rather hold at current levels while 28% intended to book profits. Now, this is impressive considering the fact that the results of a similar question polled at Equitymaster, prior to the declaration of June quarter results at 3,600 Sensex levels, saw 40% people voting for the 'sell' option while another 30% opted to 'hold'. Only 30% were in the 'buy' mode.
The above results are interesting considering the fact that even last time around, the optimism was present, but with a note of caution, which could have been primarily due to the results that were to be declared and also concerns over how the monsoons would pan out. After all, our GDP growth is highly correlated to good performance on the agriculture front. Thus, while some people adopted a wait and watch policy, some others were ready to book profits and wait for confirmed signals of growth. Finally, good monsoons and results, both provided the much needed sentiment push. This change in pattern could be a sign of good times to come for India Inc.
As far as our view is concerned, we are optimistic of the Indian growth story, albeit in the medium-to-long term. Also, we would like to reiterate our reasons for the same:
India, with an average annual GDP growth of about 6%, is one of the fastest growing economies in the world. And for the current fiscal also, major independent organisations have revised upwards their GDP growth forecasts for India, from about 4% levels to about 6% now.
The government in the last few years has taken proactive steps in the development of the economy. For instance, introducing power reforms, infrastructure development, increasing FDI norms and bringing down the lending rates. Overall, our economy has become more competitive and flexible.
As mentioned above, India continues to be primarily driven by the rural economy. This is where India's 70% population resides. And it is the spending of these people that drives the economy. Just to put things in perspective, in 17 of the last 20 years, our GDP had a direct correlation to agricultural growth.
Having proved its manufacturing (and service) mettle in the last couple of years, India is likely to be a huge beneficiary of the global outsourcing story as India continues to be one of the largest outsourcing hubs. India has proved its excellence in many sectors including IT, pharma, auto ancillaries and textiles.
From the stock market point of view, the BSE Sensex currently trades at a P/E ratio of 13.5x FY03 earnings, which is much lower when compared to stock markets of the developed economies like the US, where P/E's are above 20x. Moreover, the Sensex constituents had logged in a consolidated 35%-40% growth in earnings during FY03. Even if we assume a 15% growth in earnings during FY04, the Sensex valuation would become 11.7x forward FY04 earnings. What's more, the infrastructure measures are likely to show their real worth post 2004. That could mean an even better 2005.
However, in the short-term, the hiccups could be in the form of elections that are round the corner. Akin to the past, this could allow uncertainty to creep into the markets, as the result of any elections is important while making investment decisions. Similar to the effects of a reshuffling at the top-level management of any company, a change in the current government could put to question the initiatives undertaken by it on the reforms front as also the policies implemented by it. In particular, for those, who follow a top-down approach, politics has an important role to play.
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