Be There Before The Rally Begins

With equity valuations at historic lows and corporate profits set to grow at a health pace, it makes imminent sense to log on to stocks

After moving up 40 per cent from the post- September 11 lows, the Indian markets hit multiple roadblocks, starting with the Ayodhya controversy to the latest Indo-Pak border tension. The markets surrendered more than half the gains as FII inflows dried up and domestic investors continued their two years wait on the fences.

Without considering the precedents on how the market performed after crisis times in the past, we recommend buying into potent ideas as we believe that just about everything is right with the Indian markets at this point. Consider the following:

 

* Valuations are back to near multi-year lows. A structural fall in interest rates is one of the biggest positives for India. Equity valuations are now even more attractive compared to debt yields. Even corporate profits are getting a boost due to lower interest costs.

The Sensex now trades at a forward PE multiple of 11.x (10.4x at the recent low) against a forward multiple of 10.4x in September 2001. This is at a 40 per cent discount to the three-year average forward multiple for the Sensex.

* Privatisation has gathered unprecedented momentum. The next twelve months will not only witness big-ticket privatisations, but also open the floodgates for a more broad-based divestment schedule.

Besides improving the efficiency of PSUs, we argue that privatisation will also be a major source of liquidity to the markets. We believe NALCO will be the first to go off the block followed by HPCL and BPCL. We also expect PSU stocks to continue outperforming the market.

* Strong signs of economic recovery: there