Sensex 31,000 By Next Diwali

A lot has changed since last Diwali. The gloom surrounding the Indian economy during last year same time did not give us the leverage to celebrate the festive season. The economy was growing below 5 per cent; the pace was at its slowest pace in the previous 11 quarters; inflation was hovering at double digit; the stock market was drifting and going nowhere - and the reason for such a poor condition fairly and squarely was on weak political leadership that failed to take decisions. One year down the line and there has been a diametric change in the entire situation and everyone is in a festive mood.

The equity market, especially after generating return of 35 per cent in the last one year is heading for a tipping point again as was witnessed in 2009. The Indian economy is expected to perform better amid slowing world economy;falling commodity prices; and finally a strong and stable government at the centre that is in the process of changing the way the government governs.

We are already seeing the impact as IMF in its latest report has revised the outlook for the Indian economy, which is expected to grow by 5.6 per cent from the earlier projection of 5.4 per cent. Whereas same report has sounded alarm by cutting its growth forecast for the world economy as well as for the key economies of the world. The world economy, according to the report, is slated to grow at 3.3 per cent in the current year as against 3.4 per cent projected a few months back. One of the factors that have helped the upward revision in the Indian economic growth rate is the improvement in perception after a stable and decisive government came into power four months ago.

Standard and Poor’s too raised the outlook for India’s ‘BBB-minus’ rating to ‘stable’ from ‘negative’, saying that the country’s government mandate and improved political setting offered a conducive environment for reforms. There is no dearth of good news after Narendra Modi has taken over as the prime minister of India. The GDP growth has accelerated; inflation measured by both WPI and CPI are at their multi-year low and finally an Indian spacecraft is orbiting Mars.

The fact that commodity prices are also coming down could not have had a better timing. Crude oil and gold,the two important commodities that had earlier put pressure on our currencies as current account deficits widen, are currently trading at a multi-year low, which augurs well for our economy as well as the stock market.

Our own analysis shows that bellweather indices could easily give 20 per cent return in the next one year and the Sensex might reach 31,000 by next Diwali, especially looking at the current tailwinds supporting the Indian economy. The commentary of some of the market experts also points towards the same direction. They are expecting bellwether indices to double in the next four years. Back of envelope calculations shows that indices need to grow at CAGR of 19 per cent for the next four years to double it. We have already seen the earlier Sensex achieving this feat between 2003 and 2006, where the Sensex increased by more than four times. Our cover story this time presents you a portfolio of seven stocks that, we believe, will help you to create good amount of wealth by next Diwali. 
In one of the important developments recently, the SEBI in its latest order has bared six directors of DLF from accessing the securities’ markets for three years because they lied during the IPO. DLF owned some companies as subsidiaries; the holding of these companies were moved to the wives of key executives so that these companies weren’t shown as subsidiaries and the related disclosure required during the IPO.The impact of this ban was visible in the share price of DLF which fell by 30 per cent in a single day. The order penalises more than anyone else the unfortunate minority stockholders who have seen the DLF stock lose 90 per cent of its market cap from a high of Rs 1,400.

Events like this really make a dent on India’s image as an investment destination and a more stern action by the market regulator, such as asking key executives to cough up money to delist DLF’s share at the IPO price, would give a strong message to the errant management and build confidence in the investor community.

Happy reading and a very Happy Diwali to all our readers.