The Indian stock market turned out to be among the world's best performers in 2014 with the Bombay Stock Exchange (BSE) Sensex rising 29% from 21,140 on January 1 to 27,312 on December 19. Most market players believe this stellar run will continue in 2015 on the back of reforms, strong foreign fund inflows, revival of manufacturing, improvement in the macro-economic situation and rise in corporate earnings growth.
Attractive Valuations
Despite the sharp rise, the valuation of the Indian stock market is still attractive. On December 12, the Sensex was trading at a price-to-earnings (PE) ratio of 18.5, marginally lower than the five-year average of 18.77. Yogesh Nagaonkar, vice-president, Institutional Equities, Bonanza Portfolio, says Indian stocks are an attractive investment if the person's horizon is three-five years. One reason is that the return on equity of BSE 200 companies is bottoming out. "Revival of growth of Indian companies, which were facing tough times for the past five years, is still at a nascent stage. Nifty 50 companies can see 16-17% earnings growth in the next one year. This may rise to 19-20% two years from now," he says.
"Indian companies have done massive restructuring over the last five years. Almost every business has become leaner and focused on efficiency. Because we don't expect further deterioration, we see operating and financial leveraging show its maximum impact in 2017-18," says Ravi Gopalakrishnan, head of equities, Canara Robeco Mutual Fund. If we look at the numbers, India's stock markets have risen quite a bit of late, but even then they are not very expensive. At present, they are trading at 17 times forward earnings for 2015-16. Though this is slightly above the long-term average of 15 times, it is not very high. Gopalakrishnan explains why. "Earnings pick-up in 2017-18 will trigger expansion of PE multiples," he says.
New Themes
In every bull market, a new set of stocks performs well and comes on top. For example, around 2000, information technology (IT) stocks were everyone's favourite. Between 1 February 1999 and 13 December 2000, the IT index rose 94% on a yearly basis, as against 15% returns given by the Sensex. This period was followed by the era of infrastructure stocks in 2004-08. To see how much liking markets took to these shares, look at returns from DSPBR TIGER fund, an infrastructure fund from the DSPBR stable. Between 11 June 2004 and 9 January 2008, the fund returned 65%; the stock market returned 50% during the period. While in 2007-08 FMCG stocks did worse than the market, they were the darling of investors for the next five years (See The Best And The Worst). "The main constituents of the present rally will be different from what we have been seeing," says Vaibhav Sanghvi, managing director, Ambit Investment Advisors. He says Europe and Japan are not doing well and China is slowing. The US, he says, is the only big economy which is growing. In this backdrop, domestic industrial, material, consumer discretionary and financial companies are likely to do well, he says.
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