An excerpt of Prashant Jain's views shared on India Infoline,
Looking at the future, I think another, equally promising, "tomorrow" beckons.
The worst on the economic front in India is clearly behind us - GDP growth is improving, the current account deficit has narrowed sharply, the fiscal deficit is slowly moderating, inflation is steadily coming down with visible moderation in key constituents i.e. food and fuel. Lower interest rates are thus a natural corollary over time.
A strong, growth oriented and business friendly government bodes well for economic growth and for businesses.
Given the likely recovery in the capex cycle, over the next few years India's growth rates should exceed China's in my opinion. By the turn of the decade, India should thus emerge as not only one of the largest but the fastest growing economy as well.
Current P/E multiples of equity markets are reasonable - neither expensive, nor cheap. However, corporate earnings should be better than estimates as corporate margins are significantly below the long term averages and should improve as capacity utilisation and business conditions improve. There is thus room for multiples to expand as growth improves and as interest rates move lower besides strong earnings growth.
A popular observation about the markets is that the markets have run up nearly 40% in last one year! A more pertinent observation is that the markets are up only around 30% from the pre Lehman levels over the last 6 years! Markets have thus sharply underperformed nominal GDP growth over the last six years, in spite of the sharp move in recent months.
As mentioned earlier, P/Es are still reasonable; there is room for P/Es to move higher over time as growth picks up, as corporate margins normalize from depressed levels and as interest rates move lower. Most importantly, the growth prospects for the Indian economy are now very encouraging. Imagine what growth India can deliver in a good environment when it has grown at nearly 5% in a year as challenging as the last year!
