Sensex may fall 10%

The recent run up in stock prices have made valuations expensive

India’s stock market may fall by as much as 10 per cent within six months as company earnings fail to meet expectations, according to Pankaj Tibrewal, manager of the country’s best performing equity fund this year.

"The stock prices have run up; fundamentals now need to catch up," Tibrewal said in an interview. "If that doesn’t happen, you could see real disappointment."

India’s benchmark stock index is the second-most expensive among the four biggest emerging markets, based on profit predictions. The gauge has doubled from its March 9 low, helped by record low borrowing costs and increased government spending.

"If something looks too good, then we need to take it with a pinch of salt," said Tibrewal, 30, whose Principal Emerging Bluechip Fund’s 120 per cent return this year was almost double the gain in the Bombay Stock Exchange’s 30-member Sensitive Index, or Sensex.

The prices of most shares in the benchmark measure already reflect 2011 earnings, he said. The Sensex is valued at 19.1 times estimated earnings, the most expensive among the so-called BRIC countries after China’s Shanghai Composite Index, which trades at 23.3 times. Brazil’s Bovespa index is valued at 16.1 times, while Russia’s Micex trades at 12.2 times.

Disappointments
Second-quarter profit at some of India’s biggest companies disappointed investors. Reliance Industries, the country’s largest company by market value, last week reported operating profit that fell short of analysts’ estimates. DLF, India’s biggest developer, whose net income fell for a fifth straight quarter, said this week the economy needs to expand by 7 per cent to 9 per cent a year for commercial property demand to recover. India’s gross domestic product may expand by as little as 6 per cent in the year to March 31, the central bank forecast.

The next six to 12 months will be a stock picker’s market, said Tibrewal, adding that he gets his best investment ideas by talking to a company’s competitors, clients and workers.

BNP Paribas predicted Indian stocks may gain as much as 32 per cent by the end of next year as a recovery in companies’ production output and more efficient use of factory lines help boost economic growth and earnings. Nomura Holdings also said that Indian stocks entered "attractive territory" after the retreat from this year’s high.

Tibrewal holds about 5 per cent of the $300 million he manages in cash to buy stocks when prices fall. He prefers Pantaloon Retail India, India’s biggest retailer, and Asian Paints, as well as companies operating ports, tollways and utilities, and avoids telecommunication and cement stocks.