Valuations 'undemanding, upside ahead'

The benchmark Bombay Stock Exchange (BSE) Sensex hit a new all-time high today. Brokers said the undercurrent among investors remains very positive.

While the general consensus is that Indian markets are poised for further upside from a long-term prospective, there could be intermediate correction in run up to the Budget.

Business Standard spoke to Narayan S A, managing director, Kotak Securities, and Devesh Kumar, head of equity, ICICI Securities, to get their take on the current and future scenario. Excerpts:

At current levels, are Indian markets overvalued compared with other Asian and global markets?

Narayan S A: India is definitely catching up with the rest of the world, particularly its Asian peers, on the basis of P/E valuations.

The Indian market at the current level appears to be fairly valued on a FY05 basis. However, looking at the growth "" both in revenues and profitability of the Indian companies "" there appears to be good upside on FY06 basis.

Devesh Kumar: No. Even if current valuations of Sensex is comparable to regional markets, on a two-year forward basis, the local valuations are undemanding. The Indian economy is headed for a 6-8 per cent growth over next two years and the growth is being propelled by all the sectors of economy.

What would be your advice to retail investors from a short-term and long-term perspective?

Narayan: Economic growth, thrust on agriculture, earnings growth posted by companies, infrastructure creation, strengthening rupee and the general decline in the interest rates are few indicators that point to the robustness of both Indian economy and the corporate sector.

We would advise investors to look for long-term gains in the Indian equity market, which would outperform in long run to any other asset class.

In the short term, volatility would be observed and factors such as the Union Budget, monsoon and FII inflows would set the direction and the pace of the market. In the short term, the market is expected to be range-bound and volatile.

Devesh Kumar: We expect the markets to give good returns both in the short and the long terms. However, the returns over next 2-3 years will be higher than in the near term as a major part of re-rating of the Indian market is over and going forward Indian story is likely to be driven by the strong earnings momentum.

What are the fundamental changes that has taken place in the last 18 months which resulted in accelerated growth across various sectors?

Narayan: The key fundamental changes are, higher growth rates in sectors where penetration were traditionally much lower, for example- telecom, insurance, retail, financial services etc.

Higher capacity utilisation by the corporates, reduction in interest rates in general has helped in many ways to the companies.

Proactive measures taken by the government in order to reduce red-tapism and boost the investment scenario in India has also changed the fundamentals considerably.

Devesh Kumar: The changes have been taking place over last 10 years. The recent triggers of growth have been the multiplier effect of highway construction and increase in telecom penetration.

The strengthening of market forces in all walks of life has boosted the investor confidence - both portfolio and direct investors.

The FIIs have been the dominant players in Indian markets over the last 18 months? Going forward what will keep them interested to remain invested in Indian securities?

Narayan: It is true that the FIIs have shown great interest in the Indian market, particularly in last 12-18 months. It is evident from the fact that significant number of FIIs have registered with Sebi and FII inflow has topped $8 billion in CY04 and over $1 billion in CY05.

However, the downside of such an inflow is volatility. We believe that government's decision to allow non-state provident funds to invest in equity market and the RBI's permission to selected banks to increase their exposure more than 5 per cent in equity market would reduce volatility and over-dependability on the FIIs.

Devesh Kumar: The Indian growth story has just begun. As infrastructure investments and consumption expenditure grow, the earnings of corporate India will reflect this aspect. This upward growth trajectory will continue to keep FIIs interested in India.