Is this correction an opportunity?

Mon, 31 May Pre-Open

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The Indian economy seems to be getting back on track. This is suggested by a survey of economists by Bloomberg. The results suggest that the Indian economy grew by around 8.6% in the quarter ended March 2010. This is the fastest pace of growth since the quarter ended December 2007. It signifies the importance the government’s bailout and then flush of global liquidity has played in the recovery.

Anyways, while the recovery is good, one negative fallout of the same is rising inflation. What started earlier with food price inflation has now spilled over to no-food areas like commodities as well. And now given that inflation is showing no signs of cooling off, the RBI is looking at raising interest rates, though at a measured and cautious pace.

Anyways, as per advance estimates from the Central Statistical Organisation (CSO) in February, the economy is set to grow by 7.2% in the year ended March 2010. This is an improvement over the 6.7% growth seen in FY09 after the 9% rate that was achieved for the previous four straight years.

The benefits of the economic recovery are already being seen in the performance of Indian companies. Of the major ones that have announced their March quarter results so far, sales have grown by 21% YoY. This was after the 10% growth seen in the December 2009 quarter.

As for some key sectors, autos are having their best days. Or what would justify the 40% growth in car sales in April, and that too after record sales in the previous months as well. Also as per reports, industrial output grew by 10% in FY10. A pickup in consumption is also seen. Consumer durables production grew by over 30% in the last five months. This is indicative of higher purchases of televisions and refrigerators and also growing consumer appetite. Capital goods output grew by over 25% in the past three months. This suggests improved signs of greater investment activity.

Overall, the Indian economy seems back on track. This is however notwithstanding another slowdown that the European crisis could potentially bring. As for the stockmarkets, these are currently at their volatile best. While overall valuations have come down a bit over the past 2-3 months, investors do not seem to be putting a lot of money on the table.

We however believe that the correction in Indian markets in recent times has largely been on the back of economic concerns in developed markets. It has hardly anything to do with Indian economy or Indian businesses. On the contrary such a correction presents an excellent opportunity to long term investors in India to take advantage of lower valuations.