What’s in a number?

With the BSE Sensex scaling the 30,000 level, voices cautioning a steep fall are becoming louder. This kind of prognosis is common when benchmark indices reach important milestones — but it is not warranted. Shorn of the hype around the 30,000 number, the gain in the Sensex this year is not large enough to cause consternation. The Sensex is up around 13 per cent, while the Nifty is up 14 per cent since January.

The rally witnessed in our market since the beginning of this calendar is also not without a fundamental basis. December quarter earnings of India Inc were surprisingly robust with revenue growth of 9.1 per cent and net profit growth of 29.8 per cent for 1,700 companies, excluding banking and finance companies, analysed by BusinessLine. These numbers helped demolish fears that the Centre’s move to demonetise ₹500 and ₹1,000 notes will dent corporate earnings significantly. Further, macro and industry-specific data released so far this calendar show that the effect of demonetisation could be transient on the larger companies in the organised sector that populate the listed universe. The upturn in commodity prices has improved the prospects of the large commodity producers. Consumption-oriented sectors did see a dip in business immediately after demonetisation, but these too are beginning to perk up. This segment will get a further boost if the south-west monsoon is normal, as predicted by IMD. Increased public spending is improving the prospects of road and rail construction companies as well as capital goods manufacturers. While a strengthening rupee could affect earnings of IT and pharma companies and asset quality woes of banks continues to be a concern, India Inc on the whole appears to be on a firm footing.

The sound prospects of Indian businesses have attracted both foreign and domestic investors. Foreign investors have brought in record levels of funds in the first quarter of this calendar helping the Nifty and the Sensex outpace other global indices. Inflows from domestic investors continue to be strong, especially with pension money entering the market. At a one-year forward price-earning multiple of 17.5, the Sensex’s valuation is in line with its long-term average and cannot be called a bubble yet, given that the index’s historical peak valuation on a one-year forward earning basis was around 24 times. But a few pockets are getting over-heated. The small-cap segment where volumes are lower and price manipulation rampant, is one such space. As elevated stock prices attract more retail investors, SEBI should step up its vigilance to ensure that small investors are not hurt. Stocks that record undue movement should be scrutinised to reduce unfair and fraudulent practices. Domestic investors are beginning to show greater affinity towards equities. SEBI should ensure that this interest sustains.

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