Sensex @ 17K: Speedbreaker ahead

The Indian stock markets are on a roll. Soon after the Sensex touched Mount 17K on September 26, the 50-stock NSE Nifty too closed above the 5,000 mark on September 27. In doing so, the Sensex had its fastest 1,000 mark rise.

If Yuvraj Singh hit 6 sixes in an over, the benchmark Sensex too notched a 1,000-point rally in six trading sessions. However, after the initial euphoria -- just like the Indian cricket team who takes on the might Aussies from September 29 onwards -- the question now uppermost in every body's mind is: How long will this party last?

If liquidity is a measure that can help gauge the mood on Dalal Street then everything seems gung-ho. Foreign institutional investors, the movers and shakers of the Indian stock markets for quite a while now, are anything but bullish.

They have pumped in a whopping $ 3,358.1 since the beginning of September (source:Sebi) during which time the Sensex and the Nifty rose 1,728 points and 525 points respectively.

Says an analyst with a Mumbai-based hedge fund on the condition of anonymity: "The markets have risen too quickly for anybody's comfort."

So, is he expecting a sharp correction now that the markets have surpassed everybody's expectations in too short a time duration?

"Well, I'd not suggest a crash but a 3-4 per cent correction in about a months time is due and would be healthy for the future course of the Indian markets," he cautions.

If one were to take valuations into consideration then they don't seem too stretched reckons this analyst. "The market is expecting an Rs 980-1,000 EPS from the Sensex stocks for FY09 and based on this the valuation is somewhere around 17-17.5 times FY09 earnings. This is not too steep but a correction is due," he stresses.

According to Mumbai-based BSE member Dipan Mehta the Sensex as of now is fairly valued. The only concern could come in the form of second quarter results due in the second week of October.

"The market expectations are too high from the bellwether stocks. If their numbers disappoint, then there is a possibility of a near-term correction," feels Mehta.

However, he too is bullish on the long term prospects of the Indian equity markets. "Even if the second quarter results disappoint the market, the subsequent quarters are likely to turn up better and the markets can once again be on an upward journey'" he adds.

Sensex heavyweights like RIL, HDFC and ICICI Bank have rolled out ambitious expansion plans and these businesses will take some time before they become profit-making according to Mehta. Once these businesses start delivering there will be good times ahead as well.

Having said that, Mehta is negative on frontline IT companies that make up the Sensex like Infosys, Satyam Computers, Wipro and TCS. The rupee has been on an upward trend against the dollar and this is likely to affect the profit margins of IT companies.

However, when it comes to the mid cap and the small cap stocks both the analysts rediff.com spoke with have differing views.

While the hedge fund analyst believes that one can expect a reasonable correction in the mid cap and the small cap space, Mehta believes that there are good stocks in this space that have underperformed the broader markets.

Stocks like Subex, 3i Infotech, Tanla Solutions and Northgate Technologies still have potential upside left in them, says Mehta.

Broadly speaking, both the analysts believe that party in the Indian stock markets will continue going forward. They see a few minor bumps in the oil prices ballooning in international markets, inflation in India and the consequent increase in interest rates. However, for them it is still time to party notwithstanding the cautionary expectations of a 3-4 per cent intermediate correction.