Nifty has delivered returns of 23.4% year-to-date and is one of the best performing global equity market in CY14. Off late, in the month of Oct14, Indian equity markets are facing huge volatility due to economic slowdown in developed world. Weak economic recovery in developed world has led to slump in commodity prices, with correction to the tune of 15-25% in crude, coal, metals, etc.
The ~22% YTD fall in crude oil price will put an end to diesel under recoveries, easing pressure on twin deficit and hence will lead to channelizing of resources towards productive assets in medium to long term. Moreover, it will ease the inflationary pressure on the economy across the length and breadth and will leave room for RBI to ease key policy rates. Green shots of recovery in Indian economy are already visible with healthy GDP growth of 5.7% in 1QFY15, revival in auto sales number, decent credit growth and continuing healthy trend in exports.
On forex front, RBI governor Raghuram Rajan has done commendable job of stabilizing Indian rupee against dollar in the range of 59-62 and has build enough forex reserves (@ $311 bn) to face any global eventuality.
In medium to long term, to bring economy back on track, government is likely to take the following steps 1) change in cumbersome processes and overhaul of laws (labour, land acquisitions etc) related to setting up and running business in India.
The effort is to make conducive environment to do business in India with ease and thereby attract foreign companies to setup manufacturing base in India, 2) announcement of gas price formula and clarity on various policies related to oil and gas industry, so as to give long term visibility and clarity; 3) deregulation of diesel prices and roadmap for reducing subsidy burden on LPG; 4) policy, roadmap and support for affordable housing for all by 2022; 5) implementation of DTC in FY16; 6) implementation of GST in FY16/FY17 and many more.
In nutshell, we believe that, best is yet to come for Indian economy and India’s GDP is likely to grow at 5.5% and 6.2% in FY15E and FY16E respectively (Source: Bloomberg). Corporate earnings will reflect the same and Nifty’s earning is likely to grow at CAGR of 15% during FY14-FY17E period.
On valuation front, Nifty is trading at P/E of 16.2x, 13.6x and 11.7x of FY15E, FY16E and FY17E earnings respectively. In short term, market will be driven by global factors, however, in medium to long term, we believe, Indian equity market is in midst of structural bull run and hence, the trajectory is likely to remain upwards.