What has truly changed the perception of foreign investors about India? In the latter half of 2022, many Foreign Institutional Investors (FIIs) began reducing their exposure to India, favouring China, which was seen as being on the verge of recovery. Vijay Mantri, Chief Investment Strategist at JRL Money, a mutual fund advisory firm, highlights: “There is currently excessive liquidity. FIIs withdrew funds from emerging markets and invested in China, which had a much lower P/E of 7. However, China’s performance fell short, and FIIs had to withdraw and seek performing markets. India emerged as the beneficiary, while retail investors smartly stayed invested throughout.”

This does not only pertain to emerging markets; India also stands out as one of the best global markets. This is one of the reasons why investors are coming in despite the relatively high premiums and other payments.

During the Covid period, Indian companies, especially those in the finance sector, took the opportunity to streamline their operations. They went on a deleveraging spree, and banks used the time to address their NPAs in a meaningful manner. By putting their houses in order, Indian companies are now better positioned to seize opportunities in the post-Covid period.

Sankaran Naren, CIO and fund manager, ICICI Prudential MF says: “We are of the view that India has one of the best structural stories in the world. It has good demographics, good long-term growth, corporates are in good shape, corporate earnings are improving.” Naren points out that with no non-performing loan problems, robust banking system, etc, “there is no other country in the world which has such a robust growth story for the next decade. Due to all these reasons, Indian valuations are high relative to the world”.

Boost to consumption

The India story is not new and investors have been well aware of it. “Systematically we are improving,” says A Balasubramanian, MD and CEO, Aditya Birla Sunlife Mutual Fund. “Macros of the economy are sound. This time the fears about the monsoon being adversely impacted by El Nino have proved unfounded. Rural demand is picking up and this will give a boost to consumption.”

It is not just consumption which is firing the economy. Investments are also taking place. “This is indeed the best of times,” says Deven Choksey, MD, KR Choksey Holdings Pvt Ltd. Choksey adds: “India is spending huge amounts on infrastructure. It has already spent upto Rs110 crore of the Rs20 lakh crore which was promised to be spent over the next three years. One rupee spent on infra has a multiplier effect of almost 7x. This money changes hands several times creating further job impetus. FIIs are attracted towards investments both on the revenue side as also the capital side. Individuals also benefit. There is a wave of optimism amongst people. Government, corporate sector and individuals are spending more.”

Commitment to new projects in FY23 has gone up to Rs25.31 crore with the private sector accounting for more than 2/3 of the total commitments (see Business India, Special Report, dated May 15-28). Nearly 132 mega projects have been announced in food processing, pharma, green hydrogen and ammonia. Even public sector companies have been announcing JVs with the private sector.

Indian Oil, India’s biggest oil refinery, recently announced projects for enhancing bio-fuel production capacity with Praj Industries. It also tied up with a Singapore based company, Sun Mobility Pte Ltd, to venture into the battery swapping business. Instead of depending on the government for infusion of capital Indian Oil proposes to raise Rs22,000 crore by way of rights issue for funding these projects, partially or otherwise.

Besides, there are several mega infrastructure projects which are in various stages of completion. The Chenab River Railway project, one of the most prestigious projects of the Northern Railways, will be functional in a few months. Mumbai-Ahmedabad High Speed Railways, Navi-Mumbai International project, Sagarmala, Narmada Valley Development projects – all run into thousands of crores. What is noteworthy is that the combination of investment demand and consumption demand is expected to make companies’ profits soar even further. That is also being seen by investors as a significant factor in future growth.

Another big factor which is often overlooked by Indian investors is the huge impact of the prime minister’s visits to other countries. During his visit to the US he met President Biden and also a whole lot of corporates and the who’s who of US Inc. This was followed by visits to UAE, France, Egypt where a lot of deals were struck. Deven Choksey says: “India is being marketed very well overseas. Prime minister Narendra Modi is doing a great job for India.”

Midcaps, small caps shine

There are more than enough factors to justify the optimism in the air. The major concern is as usual at the start of any bull run, is whether this bull run has enough steam. “I am super bullish,” says Ajay Garg, a leading investment banker, and founder of Equirus Capital, a full-service financial outfit. Equirus, which is also a leading player in the new issues segment, points out that:  “Midcaps and small caps are also performing. Over the last 1 year they have outrun the main indices.” BSE midcaps and small caps have risen by 33 per cent, out-performing the Sensex which gave 23 per cent. Garg says: “2023 may see new issues of at least Rs50,000 crore hitting the markets.”

When the going is high, everything is hunky-dory. But in any markets, downside risks are always present even though they may not be always visible. Another question is whether it is a good time to expand one’s exposure during a bull run. Experts, as would be expected, differ on this aspect.

Vijay Mantri says: “While the long-term India story remains intact, I feel investors have to exercise caution. No big money will be made from these levels.” Mantri adds that “unless corporate earnings catch up, it will be difficult to sustain the inflows”. Mantri expects intermittent volatility, saying: “Markets have already discounted that the Modi government will be back with a thumping majority in the forthcoming Lok Sabha election, next year. Market also expects that investment conducive policies will not be too unpredictable.”

One of the reasons for Mantri’s caution is the high valuations. Expectations and optimism form a major part of the price of any shares. Expectations may seem rational, irrational, and can rarely be justified. S Naren explains: “Today we have good news and high valuations. The challenge now is the high valuation. Besides this, there may be difficulties along the way because of global macroeconomics, monetary policy choices, and the geopolitical situation, which could produce sporadic volatility. We think that rather than investing in just one asset class in such a situation, investors would be best to take a multi-asset approach.”

“There is no reason to be negative. I don’t see major downside without any major event,” says Anniruddha Sarkar, CIO, Quest Investment Managers, a Mumbai-based portfolio management entity. Both FII and domestic flows will continue. Valuations are getting higher but are not stretched at these levels. If it goes higher, we may get concerned. Currently, what we are witnessing is sector rotation. Over the last 6-9 months, the IT sector was beaten down. Now investors are looking at bargain hunting at these lower levels.

Optimism is also evident in the real estate sector, which was also untouched by the majority earlier. Sarkar is optimistic about earnings growth catching up with the seemingly high valuations. He rationalises that: “As far as earnings go, margin improvement is seen. While the topline may see sluggish growth, the bottom line will see much better growth. Raw material prices have come down. Banking will continue to see good growth, as will auto and auto ancillaries.”

One of the other factors which is frequently overlooked is the fall in prices of crude, one of the bugbears of the Indian economy. With Russia emerging as one of the large suppliers meeting nearly 40 per cent of India’s demand last year, crude import prices have been steadily declining. Ashutosh Bhargava, Fund Manager, and Head Equity Research, Nippon India Mutual Fund, says: “India is a big beneficiary of the decline in oil and other commodity prices. This has improved India’s macro-outlook as inflation and external sector risks have reduced considerably. Similarly, many sectors may witness a sharp improvement in margins thanks to easing input cost pressure and, therefore, earnings and growth are likely to remain healthy and broad-based despite weak global demand. Pro-business reforms and strong corporate and bank balance sheets bode well for a robust capex cycle in the medium term.”

“Buoyancy will continue,” predicts A Balasubramanian. He adds that corporate earnings appear to be pretty decent and this will sustain the momentum, going forward. The finance sector will also continue to do well. With banks as well as NPAs under control, credit growth is picking up. Banks will do well. Exports of services are better. Remittances, FIIs, and NRIs have seen forex swelling. Bala says globally India’s prowess in manufacturing is being noticed. And the China + one policy is working. The phenomenon of export substitution is being observed. Industries which I feel will do well besides banks are auto and ancillary and capital goods. IT may stay muted for some more time, he adds.

Experts have their own views and fears. However, a look at the markets since June 2003, when the mother of all bull runs started, shows that the equity markets have given super-normal returns. Sensex was around 2,934 in June 2003. In the span of two decades since then, the market has gone up 22 times. Even the broader market encapsulated in the BSE 500 index shows a return of 13 times in the same period.

Business India, which has been closely observing markets for more than 4 decades, feels that the current rally being witnessed is just the beginning of another great bull rally. Markets favour and love stability and predictability. In earlier pre-election rallies, one had seen investors, particularly FPIs, paring down their exposure and restoring the same if the present government continued. In the event of a change in ruling parties at the Centre, investors typically wait for indications of the new government’s policies before making any significant moves.

The current rally seems to indicate that the market has already discounted that the BJP-led NDA government will again win the elections. While the actual event may not spark off another rally, some more inflows from fence-sitting FPIs will again lead to a marginal double-digit rise. Till the elections, however, one may see intermittent volatility. In the case of a sharp fall, one can, if one has the appetite for risk, buy into good shares. Given the likely growth in infrastructure demand, steel, cement, aluminium will go up.

Even if the global prices do not move up and the companies are unable to earn super-normal profits, the demand growth will ensure better volume growth. Property, which is also a beaten-down sector, is showing signs of picking up. There is a good chance of growth in both commercial and residential segments. While there is enough inventory, the pace of demand will quickly see developers announcing new projects. Redevelopment, which is a city-specific concept in places like Mumbai, is also gathering steam.

With governments assured of higher income through property taxes through new buildings coming up, redevelopment of slums may also get a boost. This time around, however, the boom in real estate may not see the mushrooming of new developers but benefit old developers with property owners going in for big names that are tried and tested.

The only factors that could puncture the rally in the short term are geo-political factors. Living amongst a hostile neighbourhood, India has to stay on guard 24x7, all year around. This is also one of the reasons for investors latching on to defence sector stocks. However, taking all factors into consideration, the fact remains that markets have entered a different orbit, and investors should use this as a chance to reshuffle their portfolio and move upwards into quality stocks.

Good macro and good micro factors will ultimately outweigh fear, with optimism emerging triumphant. In any bull run, it is always advisable to keep some cash handy to grab emerging opportunities.

Are Indian markets really overvalued?

The price-earning ratio is one of the several good indicators to evaluate the markets. More than the earnings it is the growth in earning which is really important. The expectation of high growth is often reflected in the price of shares and consequently there is a relatively high p/e compared to other global markets.

Having said that, the p/e for Sensex shares at 23.5 is not really high compared to the last 8 years. In the pre-Covid period the Sensex p/e was 24 and nearly 23. Post Covid the p/e went up rapidly on the hope that India would be a better market than others. This led the p/e to move beyond 28 for 2 consecutive years.

Currently, the market is veering back to the norm at levels of 23. Like the Sensex midcap and BSE 500 shares are also reasonable as compared to earlier years.