On A Steady Wicket
10/11/2010 3:05 PM Monday
India as an investment destination is getting increasingly attractive. Presently we have been hearing a lot of debate about the P/E of the Indian markets and whether this trading will be sustainable or not.
If we look at the situation closely enough, at this point of time investors have started to look at the FY12 estimates and taking that into consideration, we are trading at a comfortable zone of 17-18x P/E multiples. On FY11 earnings’ estimate we are trading in the 23-24x P/E multiple which is much lesser than the P/E of 28x in 2008. Therefore we cannot say that we are exposed to stretched valuations. Also, our frontline stocks are not undervalued. As mentioned before, we offer a sweet spot thanks to the growth v/s risk relationship and therefore the investors are ready to pay a premium for parking their funds in India.
As of now the next thing that we are looking forward to is the status of the Q2FY11 earnings. We believe that the earnings in this quarter are likely to show better growth as compared to Q1FY11. We are after all quite aware that the earnings’ growth in the first quarter always presents a sluggish picture. In the second quarter we may see a better performance in the IT, automotive, and metal sectors. We also feel that the cement and realty sectors are likely to disappoint us on the earnings’ front.
Going forward, we see the likelihood of many news flows that may act as triggers for the markets. We are really looking forward to the 3G rollout, then we have some policy-related announcements pending on the power sector, and we have the deregulation of the petroleum products in the pipeline. We still believe that we are vulnerable to news flows. For instance, if something negative flows from the USA, we may face a drift downwards. But at present we do not foresee any such event in the near term. Meanwhile, the liquidity is likely to be in a volatile state. In our opinion, the Nifty may end up trading in the range of 5,500-6,500 for the next few months.
Coming to the interest rate scenario, the upward bias is likely to stay a bit calm but we may see it drifting upward in the beginning of the next calendar year which will depend on the credit offtake. This is likely to intensify from October onwards. On the inflationary side we feel that food-related inflation is likely to be tamed a bit as a result of the good monsoon and the possibility of an excellent harvest. In fact, inflation presently continues to be at uncomfortable levels. It is mainly demand-driven and the RBI is well-equipped to treat this concern. On the global front, companies follow the calendar year as their financial year and as such almost three-fourths of this period has passed by so that they will be keener on re-assessing their output during the last quarter while planning for the next one.
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