Here's why Nifty can go beyond 6,300

Valuations suggests that markets might touch a new high and might stay there longer rather than just touching the number and falling sharply later.

Chances are that any day now Indian markets will touch a new high. Markets are taking bad news, both domestic as well as global in its stride. The leg room provided by the US 'shutdown' means that the liquidity flows will continue for the next three months. 

 

The sharp rise witnessed since August end 2013 has caught everyone unawares. Retail as well as institutional investors were talking of a doomsday scenario in mid-August. However, Raghuram Rajan makes his entry and his booster dose to stabilise the rupee helped revive market sentiment, which is now within touching distance of its all time high level. 
 

A 'left-out' feeling has crept in domestic funds and retail investors. Dark clouds of tapering and the unknown outcome of local elections are preventing investors from committing themselves in the market.
 

For the third time since the start of 2008, Nifty is flirting with the 6300 levels. Unlike the previous two times, this time markets have the valuation tailwind working in its favour. 
 

Let's look at where valuations were in the previous two instances. In 2008, markets at the peak level were trading at a price to earnings (PE) of 22.4 based on twelve month trailing numbers and 19.4 times (Bloomberg estimates) one year forward numbers. In other words, markets in 2008 were trading at 22.4 times the profits of Nifty companies based on their disclosed results of previous 12 months. However, they were trading at 19.4 times the profits of Nifty companies that analysts expected they would post one year hence. Analysts were thus building in a growth of only 13.6 per cent in the earnings of these companies. 
 

In 2010, Nifty was trading at 21.9 times its 12 month trailing profits while on a forward basis it was trading at only 16.21 times (Bloomberg estimates). This means that analysts were more bullish at the peak of 2010 (25.93 per cent growth expectation) in their outlook for the coming year than they were in 2008 (13.6 per cent growth expectation). 
 

Cut to present scenario and we are currently trading at 16.57 times 12 month trailing numbers and 12.68 times one year forward. This time around analysts are building a 23.45 per cent growth expectation in their numbers. 
 

What the numbers show is that this time around we are approaching the Nifty's 6300 levels at far lower valuations than the earlier two times. Though analyst expectations are higher than average, the low base effect gives little reasons to worry this time around. 

While growth rate has slowed down between 2008 and 2013, the fact is that the economy and the companies, especially those making up the index, have been growing. Slow growth does not mean no growth. Thus while the earnings per share of Nifty companies in 2008 were Rs 280, they touched only Rs 287 at the peak of 2010 but now they are posting EPS of Rs 375. 
 

Valuations suggests that markets might touch a new high and might stay their longer rather than just touching the number and falling sharply later. 

Nifty near 6300

YEAR	PE TRAILING	PE 1Y FORWARD	GROWTH EXPECTATION	EPS(RS)
2008	22.4	19.4	13.6%	280
2010	21.89	16.21	25.93%	288
2013	16.57	12.68	23.45%	375