There is enough support in the wings to lift Indian shares to record highs over the next few months, market pundits say, pointing to improving outlook for corporate earnings. Mild hiccups could happen along the way, but the bulls are seen in the driver’s seat over the medium to longer term.

Quarterly results unveiled so far indicate the manufacturing sector has weathered the disruption caused by the roll out of a new national sales tax, which needed much retooling to file returns. The earnings numbers have mostly met market expectations, save a few exceptions, and indicate better times ahead.

Share prices have started discounting a rebound in both GDP growth as well as earnings in the second half of the financial year that ends next March.

Nearly half of the respondents in an Economic Times poll of 20 brokerages forecast the 50-share Nifty, which is mimicked by foreign and domestic fund managers, will likely reach 11,000 by end-March — an almost 8.5 per cent rise from the current level.

The widely tracked benchmark closed at 10,146.55, up 24 per cent in 2017, after hitting an all-time high of 10,251.85 earlier in the week.

“Currently, equities may look expensive because of excessive domestic liquidity, but recovery in earnings will support the valuations in the coming months,” Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services, told the newspaper.

Participants in the poll recommended Reliance Industries, Maruti Suzuki, Larsen & Toubro, Sun Pharma and Tata Motors as their top buys among large companies. Among mid-caps, the picks were NBCC, Natco Pharma, Godrej Agrovet, Dilip Buildcon and Cyient, while small-cap buys were MCX, Suven Life Sciences, GIC Housing, Nilkamal and Asian Granito.

Solid track

Economic reforms cause pain in the initial months, but they bring in rewards over the longer run. The Goods and Services Tax (GST) was India’s biggest tax overhaul in 70 years, and it has disrupted the way businesses are done in the country. Hundreds of thousands of small and medium businesses that never paid any tax are forced to register to avail credits. It is not an easy task and will take time for the system to cope with the flood of participants.

Because the GST would ensure better tax compliance there is a good likelihood of a reduction in tax rates, benefiting businesses and consumers. The new tax also put an end to entry levies that each state and some municipalities imposed on transport of goods, thereby making the subcontinent a single market in the true sense.

Over time the GST as well as other reforms such as the bankruptcy law would unleash the animal spirits in the economy.

Among the believers in the emerging potential for India’s $2.3 trillion economy is the International Monetary Fund Managing Director Christine Lagarde, a former finance minister of France who has a strong grasp of economic matters.

“For the medium term, we see a very solid track ahead for the Indian economy,” she told a questioner at a news conference in Washington DC after a meeting of the IMF board.

“We very much hope that the combination of fiscal, because the deficit has been reduced, inflation has been down significantly, and the structural reforms will actually deliver the jobs that the Indian population, particularly the young Indian people expect in the future.”

Her comments are significant because they come a week after the IMF lowered its prediction for India’s economic growth by 0.5 percentage points to 6.7 per cent in 2017, compared with its previous forecast in April, and cut the 2018 forecast by 0.3 percentage points to 7.4 per cent. The downward revision came after economic expansion slowed sharply to 5.7 per cent in the June quarter, the slowest in more than 3-1/2 years, beaten down by last November’s currency ban and unwillingness by companies to build inventory ahead of the GST launch on July 1.

Earnings scoreboard

Private sector Federal Bank, headquartered at Aluva in the southern state of Kerala, posted a 31 per cent jump in July-September net profit, as provisions for bad loans dropped. The result lifted its shares 6.4 per cent over the week.

However, shares in Axis Bank took a beating after the third-largest private sector lender reported earnings below market expectations, and concerns mounted about its asset quality with bad loans swelling. Most brokerages cut their price targets for the bank’s shares.

Morgan Stanley lowered its price target for Axis Bank to Rs480 from Rs550, saying the 12 per cent reduction reflected higher provisions and lower net interest margins would continue to impair earnings. The share closed at Rs460.35, down 13.1 per cent over the week.

Wipro, India’s third-largest software services exporter, reported a better-than-expected six per cent rise in quarterly profit and said it was on track to improve growth.

“In the last three quarters, our guidance has been continuously moving upwards. With that trajectory, we believe in Q4, we will be able to deliver industry-matching growth,” Chief Executive Abidali Neemuchwala told a news conference.

Securities firm Credit Suisse raised its target price on the stock to Rs270 from Rs250 and maintained its “neutral” rating, pointing out that the company’s buy-back of eight per cent of equity at a significant premium would have helped.

Cement maker ACC had a blockbuster quarter as its profit nearly doubled on lower interest costs and higher volume growth.

Brokerage CLSA upgraded the stock to “buy” from “outperform”, noting that cement demand was expected to pickup over anticipated momentum in government-led spending on infrastructure and affordable housing. It raised the price target on the stock to Rs2,150 from Rs2,050, compared with Rs1,766.85 at close.

Analysts at Citigroup reiterated ACC and Ambuja Cement Ltd as their top picks in the sector, saying ACC’s double-digit volume growth reflected a likely change in its growth strategy. Demand and prices are expected to climb after the festival season even as costing pressures are likely to persist, they added.

Bigger rival UltraTech Cement posted a 28 per cent drop in quarterly profit, weighed down by increased depreciation and higher interest cost related to recently acquired cement plants. The fall in earnings was, however, lower than expected and the shares nudged up 0.5 per cent on better prospects for the industry.

Leading companies scheduled to release their results in the coming week include HDFC Bank, Infosys Ltd and ICICI Prudential Life Insurance Co on Tuesday, Hindustan Unilever, HCL Tech, Kotak Mahindra Bank, IDFC Bank and RBL Bank on Wednesday, followed by Yes Bank and Jubilant FoodWorks on Thursday.

On Friday Maruti Suzuki, ITC Ltd, ICICI Bank, Canara Bank and Indian Oil Corp unveil their numbers and state-controlled oil explorer ONGC’s is due on Saturday.

The writer is a journalist based in India.