Big Biz

THE BIG BIZ STORY
To rise beyond 15,000 mark, Sensex earnings have to increase by 25%

Sandeep Singh
Posted online: Sunday, July 08, 2007

With first quarter results around the corner, market men look at earnings growth to drive it higher

With historic growth in sales and earnings of India Inc, at 31 per cent and 32 per cent respectively for 2006-07, the 17-month long rise of the Sensex from 10,000 to 15,000 seems to be in line. What’s more interesting is that even with a relative slower pace expected in the first quarter of 2007-08, at 25 per cent, earnings growth should continue to power it. According to Ajay Bagga, chief executive officer, Lotus India Mutual Fund, “Market is the leading indicator and makes opinion. Lot of adverse information has already been accounted for. Technology will stabilise and telecom, PSU banks, cement and construction sectors are looking strong to lead the momentum.” Adds R Venkataraman, executive director, India Infoline, “Sensex touching 15,000 is a reflection of the strength and positiveness of India’s growth story.”

But the rally has been selective — only 12 Sensex companies have grown faster than the Sensex. The five companies whose share prices have largely driven this rally from 10,000 to 15,000 are Reliance Industries (up 84 per cent), Bharti Airtel (81 per cent), Larsen & Toubro (73 per cent), Reliance Communications (60 per cent) and ICICI Bank (55 per cent). These five companies have a combined weightage of 38.4 per cent in the Sensex.
According to D D Sharma, senior vice president (retail equity), AnandRathi, “It’s not been a confident all-round rally as very selective stocks have led to the growth and this does not bring the desired comfort level.” As many as 18 companies grew slower than Sensex and six of them registered a decline in the 17 month period — Bajaj Auto, Hero Honda, Tata Motors, Hindalco, Ranbaxy and ITC.
Even so, this is the fastest 5,000 point growth in Sensex. It took 20 years and 8 months for Sensex to reach 5,000 mark from 100, a CAGR (compounded annual growth rate) of 21.1 per cent. The next rally from 5,000 to 10,000 took 5 years and 10 months, a CAGR of 12.2 per cent and the latest one, from 10,000 to 15,000, took just 17 months or a CAGR of 33.1 per cent.
The growth over the past 17 months does not really suggest that the momentum is going to continue, said Sharma: “I don’t see a further sharp rise from here in the near future and neither do I see a sharp correction.” The first quarter results seem to hold some answer to where the market will lead.
According to Anup Maheshwari, head of equities and corporate strategy, DSP Merrill Lynch, “We expect the overall results to be fine, but we are slightly subdued on technology.” IT sector is facing problems of rupee appreciation and market men are nervous about their results. IT bellwether Infosys will declare its results on July 11, which should decide the course of the market.
Compared to other Asian markets, the Indian market has underperformed and has remained underinvested in the last six months. “With high global liquidity and low domestic participation in the past one year, I expect fresh liquidity to come in and increased domestic participation once the momentum picks after results,” said Bagga. “We can see a rally till 17,000 in a few months’ time.” The good subscription of mega IPOs of ICICI Bank and DLF also indicates the strength of the market.
Looking beyond the indices, though, growth has become broader over the past three months with smaller companies getting greater recognition and several fund houses coming up with equity schemes that are looking to invest in small and mid cap companies. “We see enough growth in smaller companies in the near term and market is also recognising them, though the growth will be sector led,” Maheshwari said.
The long-term story though holds strong with market expecting the corporate results to grow at more than 15 per cent per annum, said Sharma: “Though I am skeptical on the short term movement, the long term momentum is strong.” Adds Bagga, “the long term story is supremely positive.”
If Sensex PE of 21.5 seems a concern in comparison to international markets, it should be accounted for in terms of the growth, the markets are seeing. “Only China is growing faster than us and is trading at PE of 35 so in relative terms we are better placed looking at our sustained earnings,” said Bagga.

http://www.indianexpress.com/story/204152.html