The bull frenzy sweeping Indian stock markets, fuelled by a rebounding economy and expectations for robust growth in the years ahead, has legs to stay the course with the coming festive season set to provide a further thrust to the feel-good mood.

Traditionally, sales of a wide range of consumer goods, cars and houses rise in the run up to Diwali, the festival of lights that falls in late October, when companies and businesses across much of the country hand out annual bonuses to their staff. Coming on the heels of stronger growth — GDP expanded at a nearly two-and-a-half-year-high of 5.7 per cent in the June quarter — the rewards could be more this time around.

Auto sales, for instance, rallied strongly in August, indicating a return of native demand. Maruti Suzuki, the country’s biggest carmaker with a more than 50 per cent market share, reported a 27 per cent jump in sales. It sold 111,000 vehicles in August, with domestic volumes rising 30 per cent and exports 10 per cent.

Significantly, the company’s compact sedans, including newly launched Celerio and fast-selling Swift and Dzire, saw demand soaring 53 per cent, compared with the same month a year earlier.

“We expect momentum to sustain with the onset of the festive season and launch of at least two more products this year,” sector analysts S. Arun and Ashish Kumar at DSP Merrill Lynch said in a note to their clients, pointing out that Maruti’s 17 per cent year-to-date rise in sales were well ahead of their full-year forecast.

Cement, another sector that had been in the dumps for more than two years, is also showing a rebound. Output in July surged at an annual rate of 16.5 per cent, the strongest expansion in 32 months — and this followed a second successive quarter of rising demand in April-June. Cement stocks have outperformed the market over the past six months and look good for more gains.

“We see further scope for re-rating as the sector has entered a structural recovery cycle marked by rising demand and price momentum,” Mihir Jhaveri and Prateek Kumar at Religare said in a report, recommending investors to buy UltraTech Cement, Shree Cement, JK Lakshmi Cement and Orient Cement.

ALL-TIME PEAKS

With earnings upgrades on the radar, domestic funds have now joined foreign investors to accumulate stocks. The top-30 Sensex soared to a record 27,225.85 on Wednesday — a massive 56 per cent gain from August 2013 low of 17,448.71. After a bout of profit-taking on the last two days, the benchmark ended at 27,026.70, up 1.5 per cent on the week.

The 50-share Nifty notched a weekly gain of 1.7 per cent at 8,086.85, after hitting an all-time high of 8,141.90 on Wednesday.

A sharp 150 basis points average rise in EBITDA (earnings before interest, tax, depreciation and amortisation) margins on a modest improvement in revenue growth for companies in the June quarter have lifted market sentiment that was already perked up by the change in government in New Delhi.

“If this pace of margin expansion continues in rest of the year, margins would return to long-term average from two-decade lows in 2014-15 itself,” HDFC Securities said in a commentary. “Margin expansion coupled with moderation in interest expense growth has resulted in an improvement in financial health of companies.”

It said consensus has seen a sharp earnings upgrade after the quarterly results, with profit forecast for both Sensex and Nifty companies up 5 per cent 2015-16 and up 2 per cent for 2014-15. “Consensus estimates now imply a strong 20 per cent earnings growth for 2015-16, up from low double digit growth implied for 2014-15.”

As stocks have already run up, there could be some correction in the offing, but the undercurrent is decidedly bullish. The brokerage expects the Sensex to trade between 26,500 and 27,900 over the course of this month.

QUANTUM LEAP

Foreign investors have ploughed about $13.5 billion (Dh49.57 billion) into Indian shares so far this year, and the inflows are likely to gather pace thanks to excessive global liquidity and the upbeat outlook for India. As domestic equity funds have started seeing robust inflows, past data shows that a twin-pronged demand could vastly boost the premiums for stocks.

There was a net inflow of Rs112.3 billion (Dh6.82 billion) into domestic equity funds in July, the highest since January 2008, taking cumulative three-month inflows to Rs209 billion. This compares with net outflows of Rs78.4 billion in 2013-14 and Rs147 billion in 2012-13, which resulted in domestic fund holdings in BSE-500 stocks to 3.35 per cent in June this year from 4 per cent in September 2009 — when foreign fund ownership rose to 22.2 per cent from 16.7 per cent over the same period, according to JM Financial Institutional Securities.

“Historically, when both resident as well as non-resident investors have turned buyers, the markets have traded at significant premium to their long-term averages,” Prasad Shahane at the Mumbai brokerage said.

Analysts at investment bank JP Morgan said there was a visible positive shift in sentiment — corporate commentary was upbeat about the future, asset sale transactions and equity issuances to repair levered balance sheets were in the wings, and streaks of ambition were slowly returning.

“A pro-reform stable government at the centre for at least five years has set the stage for a multi-year investment cycle recovery. Current weight of industrials and infra plays in MSCI is still well below its multi-year high and historical average, presenting an attractive entry opportunity for a long term investor, in our view,” it said.

The markets are likely to double in the next four years in tandem with the rise in corporate earnings, Bank of America-Merrill Lynch said, citing previous bull cycles as profits climbed.

“Our bullishness is driven by our view that the earnings have turned the corner and we will see earnings doubling over the next four years. We think market returns could mirror earnings growth,” the securities firm said.

“In the four years from 2001-02 to 2005-06, earnings more than doubled for the Indian markets and for the six years to 2007-08 earnings tripled. During the same period, markets tripled between FY02-06 and went up 5 times between FY02-08.”

— The writer is a journalist based in India.