Nifty climbs 8k, but rally not over

Written by fe Bureau | Mumbai | Updated: Sep 2 2014, 11:38am hrs
With the Nifty crossing the psychological level of 8,000 for the first time on Monday, experts are busy charting the trajectory of the 50-share gauge and Indian equities as a whole. Industry observers see Indian equities entering the next phase of bull run, following a 25% gain in the benchmark indices albeit with a sizable correction citing improvement in growth prospects and favourable global factors, such as the decline in crude oil prices.

Raamdeo Agrawal, joint MD, Motilal Oswal Financial Services, expects the Nifty to touch the 10,000-mark by next Budget and continues to see the current set of stocks leading the next phase of the rally, their size or sector notwithstanding.

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The companies that have performed, whether mid cap or large cap from a particular segment, are the ones that are going to lead the pack...they are going to make a lot of money in the new environment, whether it is infrastructure, car, paint or a pharmaceuticals company. Hence, I would be surprised if the leadership changes as the market progresses from 8,000 to 10,000, Agrawal said in a television interview.

It is just about five months away, which is enough time for a nice 20-25% kind of run. It could be 9,000, it could be 10,000, but I am just saying it would be significantly higher from here, Agrawal said. The Nifty took 77 days to reach 8,000 from 7,000. The fastest 1,000-point move is 24 days in September-November 2007, when the 50-share index rose to 6,000 levels, Bloomberg data show.

Maruti Suzuki topped the list of best-performing stocks during the Nifty's 1,000-point journey this summer. Maruti, the largest car-marker by volume, has gained 42% followed by Bharat Petroleum Corp (BPCL) with a 40.3% ascent. Defensives also remained the preferred pick despite hopes of turnaround in the Indian economy. Sun Pharma (37%), Cipla (36.5%) and Lupin (34.5%) featured in the list of top gainers since May.

Analysts said sentiments for automobile companies have drastically improved after the general elections, leading to higher inquiries and step-up in conversions, particularly in passenger vehicles (PVs) and medium and heavy commercial vehicles (MHCV).

India continues to be under-penetrated in terms of passenger cars compared with the developed world and other emerging markets. With consumer sentiment expected to rebound on the back of an economic revival, passenger car demand is likely to see strong growth over the next couple of years. Maruti with a slew of new launches is well placed to increase its market share. Volume growth, coupled with margin expansion, will drive 28% earnings CAGR for Maruti during FY14-17e, which makes it one of our top picks in the auto space, said Amar Ambani, head research, IIFL.

Maruti's 12-month trailing price-to-earnings (P/E) expanded 42% compared with Nifty's 11.2%. Others like BPCL, Sun Pharma, HUL and Tata Steel have also seen double-digit growth in P/E expansion, Bloomberg data show.

Neelkanth Mishra, head of equity strategy-India, Credit Suisse, said risks to the market remain global, not local. We, however, still believe India has primarily gained from a global expansion of P/E multiples. Elections just reduced tail risks. Index EPS growth could pick up to 11-12% from 7-8%, and a 30% return for the index over two years is quite likely even if the investment cycle disappoints. We highlight Maruti, TCS, Axis Bank, HCL Tech, RIL and ITC, among others, as our picks, Mishra said.

On the other hand, bluechip companies like Reliance Industries, ITC and Cairn India have been laggards in the current rally with negative returns, while leading IT companies, such as Wipro and HCL Tech, have given single-digit returns.

History supports our earnings cycle view, says Jyotivardhan Jaipuria of BofA ML. Earnings and markets are set to double in four years... From FY02-06, earnings in India more than doubled and the Sensex tripled. From FY02-08, earnings tripled and the Sensex went up 5x. During this period, market returns far exceeded earnings growth, given that the rally started on a low PE of 7x, Jaipuria stated in his research note.

Experts recommend staying invested in blue-chip companies and add them on every correction, despite the underperformance. Indian equities are significantly better placed than most emerging markets today. Indias equity market capitalisation is higher than the likes of Mexico, Brazil, Russia and South Africa with a wide range of large-sized companies across industries to keep FIIs excited.

Despite 27% YTD returns, the forward P/E multiple of the BSE-100 index is 16.5x, modestly above its 10-year average. Other valuation multiples including P/B, EV/Ebitda and P/Sales also indicate the markets are not expensive compared to their 10-year history. Our analysis indicates that over a 15-year period, earnings remain the biggest driver of market performance, not only at the index level but also for sectors, said Barclays Capital in a research note.