Equity: Sparklers for your portfolio

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Strict debt fund rules on anvilFIIs sell shares worth Rs 910 cr

: One of the lessons coming out of the June 14 debacle when the market slid to 8,900 levels is that the Indian markets have developed resilience. Domestic mutual funds and institutions have the wherewithal to support the market and the FIIs can provide speed or momentum at best. In fact, from January onwards, FIIs have only invested around $5.1 billion as compared to $10 billion in 2005.

This is good news for investors.

Current reality

At the current price levels, the BSE Sensex price is roughly 22 times the earnings of its constituents. This P/E multiple is higher than that of the long-term median of 15 times earnings, suggesting that the index could be slightly overpriced and may retreat. Similarly, the price is around 4 times the book value. Most of the international markets are around 2 levels.

These valuation arguments point towards a retreat in prices. Investment experts, however, suggest that these arguments must be seen in the Indian perspective. "While the price to book value is high, one must also consider in the same light that the return on equity of the Sensex is 23.5%, which is more than most of the global indices. Therefore, Indian markets will command a higher valuation," says Rajat Rajgarhia, head - institutional research, Motilal Oswal Securities.

"Although from a longer term perspective we are in a bull market, stock markets by nature will have sharp corrections and jitters. Anybody who wants to invest in equities at this point in time or at any other point in time should have at least a two to three year time horizon. Those investors who have that type of time horizon will find reasonably good investments even at these valuations," says Nirmal Jain, CMD, India Infoline.

Keeping this in mind, investors can now look at some themes that could light up their portfolio over a longer period. These themes are based on the current assessments and prospects that stem from the India growth story. These themes are not sector-specific, but are ideas that will make the most out of the opportunities as India grows.

These themes are:

Infrastructure growth deliverers

For India, to keep growing at more than 8% every year would require tremendous investment in infrastructure. One look around tells us that India requires roads, ports, urban developments. With increased liberalisation, this opportunity will keep expanding.