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Rediff.com  » Business » Stocks in 2006: Money still to be made

Stocks in 2006: Money still to be made

By Shobhana Subramanian in Mumbai
Last updated on: January 10, 2006 10:49 IST
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The year 2005 has been a spectacular one for the Indian market. At 9600, the Sensex seems to be unstoppable, and India's market capitalisation today stands at $580 billion – ahead of Taiwan's at $540 billion. The market cap is, however, behind Korea's $740 billion.

Well, will 2006 bring the kind of returns that we saw in 2005? On the face of it, a repeat of the 40 per cent return that we saw last year seems unlikely, given that valuations are becoming more expensive with earnings slowing down.

But, the Indian market has seen a re-rating, and the India story remains intact, with no fundamental negative changes in it. Given the sustainability of the attractiveness of India as an investment destination, foreign funds, which drove the market in 2005, should continue to find their way in this year as well.

Moreover, as a significant portion of the money is in India-specific funds, it is not likely to flow out in a hurry. So, while returns may not match those in 2005, there is definitely a case for buying into Indian stocks.

Profit growth is definitely slowing down, as is evident from the September quarter numbers. However, the momentum in topline growth continues. Net sales for companies, except for banks and oil exploration firms, were up 19.7 per cent year on year in the September quarter compared with 17.4 per cent y-o-y in the June quarter.

The trend should continue undisturbed in the third quarter too. However, given higher input costs, the operating profit growth could be slower as it was in the second quarter of FY06 – just 9.23 per cent y-o-y against 13.84 per cent y-o-y in the June quarter.

Besides, with capex growing and interest costs bottoming out, companies are witnessing less growth at the net profit level too. In Q2FY06, the growth at 15.16 per cent y-o-y was much lower than the 27.37 per cent y-o-y in the June quarter.

Growth in manufacturing was 9.2 per cent versus 11.3 per cent for the first quarter. However, looking ahead at the broader picture, GDP is poised to grow at 7-7.5 per cent for the next couple of years, driven by favourable demographics and consumption demand which is driving capital expenditure.

The competitive advantages that firms in Indian have vis-a-vis their peers in other countries, in areas such as technology, will ensure growth. It is not surprising that India is tipped to be one of the fastest-growing economies in Asia in the next three years.

And this means that earnings growth for corporates should be in the region of 15-20 per cent, certainly lower than the 5-30 per cent of the past few years but nonetheless creditable, coming off a higher base.

At the 9600 level, the market barometer, the Sensex, trades at 16 times FY07 estimated earnings which may not be cheap. Besides, there are stocks that are trading at valuations anywhere between 25 times and 30 times FY07 earnings, which is undoubtedly expensive given that the earnings growth projected is between 15-25 per cent. However, investors are prepared to pay a premium for India simply because growth is believed to be sustainable.

They are buying into the maket from a longer-term perspective. Indian companies, maket watchers say, should turn in better performances than their counterparts in the region given the huge consumer demand at home and overseas.

Of course, here could be a correction from these levels since there is a sizeable amount of paper likely to be placed with investors in the next three months. Issues of companies such as Maruti and ONGC are tipped to hit the market.

So, the Sensex may even retreat. But, given the growth potential for the Indian corporate sector, the Indian market appears to be a very attractive one if you are prepared to bide your time.

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Shobhana Subramanian in Mumbai
Source: source
 

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