Key word for the new year: selectivity

Although share prices have exceeded expectations for 2006 8212; the Sensex gained an impressive 46.8 per cent for the year 8212; market players remain bullish for 2007.

Although share prices have exceeded expectations for 2006 8212; the Sensex gained an impressive 46.8 per cent for the year 8212; market players remain bullish for 2007. Says S.N. Lahiri, senior VP equities, DSP Merrill Lynch Mutual Fund: 8220;This year8217;s rise has been driven by earnings growth and strong inflows from FIIs and mutual funds. Next year, we expect earnings to grow by 15-16 per cent 8212; and the market to mirror that rate.8221;

With the economy forecast to grow at 8 per cent-plus this year, and the government talking about scaling it up to 10 per cent during the 11th plan, companies have momentum on their side. Says Lahiri: 8220;A demand-supply gap exists. The capacity coming up is insufficient to cater to the growing demand.8221; Adds Ashvin Arora, MD, OptiMix: 8220;Companies have strong order books.8221;

Chances of these projections being missed are low, say experts, as there are ample internal drivers of growth, which can cushion the adverse effects of external shocks like a global slowdown. Says Abheek Barua, chief economist, ABN AMRO Bank: 8220;Domestic drivers are strong. It8217;s unlikely the US economy will slow down severely, but even if it does, it will impact India the least.8221; Likewise, with interest rates. Barua predicts a 0.50-0.75 percentage point increase in interest rates in the next eight months, but doesn8217;t see a full-blown fallout. 8220;A rise in rates may impact the property market and the consumer durables sector, but only slightly. Still, earnings should grow 15-18 per cent,8221; he says.

This will come on the heels of a particularly outstanding showing in the first two quarters of 2006-07 8212; net profit of 956 BSE companies with a market capitalisation of more than Rs 100 crore rose 33 per cent and 45 per cent, respectively. Such levels of sustained earnings growth justify the premium valuations currently being given to Indian stocks. At 13,860, the Sensex discounted its earnings of the trailing four quarters 22.9 times, making the third-most expensive among the markets that count See table. Says Arora: 8220;The Sensex is fairly valued currently. Our PE is higher than that of other countries, but so is our growth, which justifies the PEG.8221;

Although the broad indices 8212; which represent the cream of India Inc 8212; are galloping, there are pockets of under-performance deeper in the market. Of those 956 stocks, only 280 stocks 29 per cent bettered the Sensex during the year, while 367 stocks 38 per cent of that set gave negative returns. That shows the market is getting selective.

It8217;s likely to stay that way, amid great volatility. Says S. Vaidya Nathan, head, product and risk management, Sundaram BNP Paribas Mutual Fund: 8220;High degree of volatility is expected and a phase of consolidation cannot be ruled out.8221; Adds Manish Bandi, head of portfolio management services, India Info Line: 8220;We see growth in construction, IT and engineering.8221; Another active set is likely to be IPOs, where 450 companies are waiting to raise Rs 1,50,000 crore.

The range of businesses is wide 8212; developers DLF, Omaxe, stock exchanges BSE, Multi Commodity Exchange, PSUs NHPC, Power Grid, IT Mindtree Consulting, healthcare Fortis Healthcare, among others. Still, as in the secondary market, selectivity will be the theme for the year.