Expect fireworks this Diwali on Street

The Sensex will top its May 11 record high of 12,671 by Diwali because of second quarter corporate earnings that is likely to be robust, analysts said.

Strong economic growth, dovish interest rate guidance by the US Federal Reserve, and possible cooling of commodity prices will help the Sensex scale 13500 by end of the year, they said.

Hopes of strong Jul-Sep earnings are expected to push the Sensex above its lifetime high by Diwali, or October 23, said Alpa Shah, analyst at Khandwala Securities Ltd.

Analysts expect Infosys Technologies' results to be the trigger for a fresh rally.

"We will definitely scale new highs on very strong Q2 earnings starting from Oct 11 when Infosys Technologies will detail its earnings," Amitabh Chakraborty, head of research at Brics Securities Ltd., said.

In fact, some analysts are even more optimistic and expect the Sensex to top 12,671 by next week, when second quarter results start trickling in. "The Sensex will top the high of 12,671 by next week," Sandeep Wagle, chief technical analyst at Angel Stock Broking, said.

Analysts expect Sensex to scale 13500 by December, as strong economic growth, stabilising interest rates, and decline in commodity prices globally are expected to boost investor confidence, Shahina Mukadam, head of research at IDBI Capital Market Services, said.

Key indices are also likely to get a boost, as foreign funds are positive on Indian equities in the long term, analysts said.

In May alone, following a meltdown in stock markets globally, foreign funds had net sold Indian equities worth $1.67 million, causing key indices to shed nearly 20 per cent.

The Sensex has since bounced back from a low of 8799.01, touched on June 14, supported by foreign fund investment of $3 billion (Rs 137.4 billion) in Indian shares over the past four months.

One key factor for the rise will be hopes of robust gross domestic product growth for 2006-07 on the back of 8.9 per cent GDP growth in the first quarter, analysts said.

"A lot of new money has been raised and India looks attractive right now because of the GDP growth, which we expect to be around 8 per cent this year," Chakraborty of Brics said.

Corporate earnings for July-September are likely to surpass expectations, analysts said, citing strong advance tax numbers by corporate India for the current quarter.

Government collected Rs 216 billion between September 1 and 16 as second instalment of advance tax, up 33 per cent on year, indicating a robust earnings quarter.

"Indices are inching upwards and the 13000 mark is very much on the cards after second quarter results come in," R Partha Sarthy, head of institutional equities at Religare Securities, said.

However, some market-watchers are of the view that the rise in indices may not be very sharp as robust results may already be factored in.

"Some of the earnings may have already been factored in as advance tax numbers were good," Bhavin Chedda, head of research at Pioneer Intermediaries, said.

Analysts said there may be some stock specific correction if earnings are not in line with expectations.

While most market-watchers agree that valuations at current levels are expensive, they do not see this factor affecting investor risk appetite to a great extent.

"Valuations are stretched but new money is coming in and no one is willing to sell in an economy that is growing at the pace India is," the research head of a domestic brokerage said.

According to Mukadam, "we're trading around 20 times 2006-07 earnings and 17 times 2007-08 earnings. So we are fairly valued at these levels."