Re-rating in price multiples to provide additional trigger to markets

By Tushar Pendharkar

Stock markets registered a significant rally in the past 7 months, still India’s share of world market capitalization is lower than its share of economic output. In addition, the Indian market is currently trading at a P/E of 21.2x and it could come down to its long-term average of 19x with the rise in earnings.

I believe that the quarterly earnings would continue to grow for the Indian market, which would keep the indices strong compared to the global markets due to enough scope for new reforms and policies.

In addition, re-rating in price multiples would provide additional trigger to the market and keep the momentum. It clearly reflects that there is immense scope for the Indian equity market to continue the current rally.

In the quarterly results also, most of the companies have beaten the market estimates and their stocks performed significantly well, despite global tensions and a delayed monsoon.

For the high beta stocks, which include sectors such as banking, finance, metals and infrastructure, the results were not as per expectations on the back of subdued economic performance witnessed over the past 6-8 years, which provides enough room for growth in the coming years.

Unlike the high beta segment, defensives performed in-line and in a few cases even better that the market expectations, despite market volatility. ITC, Infosys, TCS, Lupin, HCL Tech, etc reported better-than-expected numbers.

The new government is focused on the infrastructure segment, which would directly benefit banking & finance, metals and infrastructure. This would not only expand their order books, but will also boost the country’s economic performance.

Indian indices have outperformed most of the global indices so far this year on the expectations that the BJP-led new government would attract investments and revive the economy with its new policies. Most of the FIIs, who missed out the recent rally, are in line to enter the Indian market.

Our market capitalization could easily double from the current levels and I believe that would happen in less than 4-5 years. Fundamentally nothing has happened till date and the government has just started unlocking its agenda. Therefore, the actual growth figures are yet to come in core areas of the economy such as banking & finance, metals and infrastructure. This means the Indian market has a lot of room to grow.

(The author is Equity Strategist at Right Horizons Financial Services. Views and recommendations expressed in this section are his own and do not represent those of EconomicTimes.com.)