Infrastructure stocks provide solid base for Indian market

Dubai: '20,000 conquered'. This headline that appeared in one of the Indian financial newspapers last Tuesday summed it all up about one of the world's most-followed indices, the Indian stock market's benchmark, the Sensex.

Looking for a perspective of the meteoric rise, one would simply be left flabbergasted to know that the index took only 10 days to cross the 20,000 mark from 19,000. That is a blitzkrieg pace by any standard anywhere in the world, except China, Malaysia and Hong Kong.

While the Sensex grew 100 per cent from the 10,000 mark to zoom past 20,000, the corresponding rate for the Shanghai Composite Index was 346.40 per cent, for Malaysia's JCI 114.15 per cent and for Hong Kong's Hang Seng Index 103.16 per cent.

Among the emerging market indices that have been soaring at comparable speeds, the growth rate of the Indian market indicator is above those of Brazil, Russia and Chile.

Foreign investment

The Sensex's runaway growth is a direct result of the continued international investment interest in booming Asian economies. Global investors are flocking to the region also because the Asian currencies are rising.

International investors are striving to reap maximum benefit from emerging economies such as India, whose markets are perceived to be in much better shape and have much more growth potential than their counterparts in developed countries.

Most experts believe that Dalal Street, as Mumbai's stock market is popularly known, will continue to witness heavy activity in the short and medium terms.

There is a rumour doing the rounds on the market grapevine. On condition of anonymity, an expert said, "Every day you come across names of new private equity companies. Nobody knows their whereabouts. The rupee is rising. So the funds that have been siphoned out of India and parked abroad are returning to India. Most of them are taking the Mauritius route to avoid taxation. That is giving birth to these private equity funds. The flash flood of investment is making its impact on the index. We only hope that a correction as in the dotcom era does not happen. For now, let's all keep our fingers crossed."

Amid all this speculation and counter-speculation, if investors are looking for a direction, soaring capital goods stocks may give them a clue.

Strong growth

Analysts quoted by The Economic Times said that L&T is trading at 45 times its 2008-09 estimated earnings, Bhel more than 30 times and ABB roughly 34 times. The investor frenzy for capital goods stocks does make us nostalgic, taking us back to the days of the dotcom euphoria.

But the foundations of this pattern of stock growth are strong. The justification for this optimism is that India's infrastructure, social and industrial, which has been deteriorating, is the focus of every government in power.

The urgency in uplifting the country's infrastructure is almost the same for a Congress-led or a BJP-led united front. That ensures the continuity of the projects and the steady visible returns from infrastructure stocks for the next three to four years. That's quite a solid foundation, isn't it?