India Stocks Seen Extending Record Rally as Modi Momentum Builds

In 2004, Indian stocks suffered their biggest rout in four years when the Congress Party defied opinion polls by winning national elections.

For Rakesh Arora, the most accurate forecaster for India’s benchmark S&P BSE Sensex index during 2013, there’s little chance of a repeat in voting that began this week. Far from seeing a selloff, Arora, head of research at Macquarie Group Ltd. in Mumbai, says the momentum behind Bharatiya Janata Party leader Narendra Modi is so strong, the Sensex will extend gains that made it the best performer among the BRIC nations. The gauge rallied to a record yesterday and will climb another 3.5 percent by yearend, according to the average estimate in a Bloomberg survey of nine strategists.

“Markets are excited about a likely Modi-led government in May and expectations are building around a new economic agenda,” said Arora, who predicts a further 5 percent gain in the Sensex by yearend. “Our targets may prove conservative.”

India’s $1.3 trillion stock market has outperformed peers in Brazil, Russia and China this year as investors anticipate the elections will produce a Modi administration with the mandate to tackle corruption and lift economic growth from a decade low. Arora’s stock picks include Larsen & Toubro Ltd. (LT), the country’s largest engineering company, and Bharat Heavy Electricals Ltd. (BHEL), the biggest power-equipment producer, on expectations the new government will accelerate $50 billion of road, railway and power projects.

Pollsters have a poor record forecasting election outcomes in the world’s largest democracy. Even in 2009, after surveys predicted a close fight, Congress won with the largest tally in two decades, boosting the Sensex by a record 17 percent as investors bet a stronger mandate would lead to economic reforms.

Strong Outcome

Arora, 44, sees a “low probability” of Modi not coming to power, while Nomura Holdings Inc. predicts a 75 percent chance of a BJP-led coalition forming the next government. Nomura expects the Sensex to beat its December-end target of 24,700 by as much as 10 percent in case of a “strong election outcome,” strategists led by Alastair Newton wrote in an April 8 report.

Support for Modi, the chief minister of Gujarat state, has swelled as graft scandals, slowing growth and the fastest inflation among major Asian countries eroded support for Prime Minister Manmohan Singh’s ruling Congress Party. Modi oversaw annual expansion of 10 percent while attracting investment from companies including Ford Motor Co. and the Tata Group as head of Gujarat since 2001.

Bullet Trains

Investors are betting his administration would fast-track projects in a nation ranked last among the four-largest emerging markets in the World Bank’s 2013 Ease of Doing Business Index. The BJP said in its campaign manifesto on April 7 it would introduce high-speed trains, build 100 new modern cities and expedite freight and industrial corridors to improve infrastructure and create jobs.

The party also said it would try to build a temple on a disputed site, instill legal protections for cows and draft a uniform civil code -- a step resisted in the past by India’s religious minorities. Human rights groups say Modi failed to control mobs that killed about 1,000 people, mostly Muslims. Modi denies wrongdoing and a panel appointed by the Supreme Court in 2012 found no evidence that his decisions prevented victims from receiving help.

The increase in share prices “is not just a hope rally as there’s high probability that a new government will improve the economic environment,” Dhiraj Sachdev, a senior money manager at HSBC Asset Management (India) Pvt. in Mumbai, which oversees about $1.3 billion, said by phone on April 2.

Limited Gains

The BJP and its allies may win 259 of 543 seats in the lower house of parliament after votes are counted May 16, according to an opinion poll released on April 4 by NDTV news channel and Hansa Research. That’s near the 272 seats needed for a parliamentary majority. The Congress-led coalition may get 123 seats, the survey indicated.

Further gains in the Sensex will be limited because the benefits of a BJP victory are already reflected in share prices, V.K. Vijayakumar, an investment strategist at Geojit BNP Paribas Financial Services Ltd. in the southern Indian state of Kerala, said in a phone interview. He predicts the gauge will end the year at 23,000, or 1.3 percent above yesterday’s closing level.

Foreigners bought a net $5.2 billion of domestic shares this year, the most in Asia, data compiled by Bloomberg show. That helped spur a 7.3 percent gain in the Sensex, versus a 0.5 percent decline in the MSCI BRIC Index. India’s gauge is valued at 14.3 times estimated profit for the next 12 months, versus 8.8 for the gauge of shares in Brazil, Russia, India and China.

Incremental Change

“Be aware that equity markets are now pricing in a drastic change, while in India policy change is always incremental, no matter who is in power,” Espirito Santo Investment Bank analysts Nick Paulson-Ellis and Deepali Bhargava wrote in a March 28 report.

Bulls including Abhay Laijawala, the head of research at Deutsche Equities India, point to a recovery in Asia’s third-biggest economy as another reason to buy stocks.

Gross domestic product probably increased 4.9 percent in the year ended March, according to official forecasts, versus 4.5 percent in the previous year. A Reserve Bank of India survey of 26 forecasters released April 1 predicts GDP will expand 5.5 percent in the year to March 2015.

The RBI left borrowing costs unchanged on April 1 after retail inflation eased to a two-year low and wholesale-price gains slowed to the least in nine months. The rupee has risen 15 percent from a record low against the dollar in August, as government curbs on gold imports pared the current-account gap.

Worst Over

“The worst is over for the economy,” Laijawala said in a March 28 interview in Mumbai. “Markets tend to re-rate when economic growth and the earnings trajectory approach a credible inflection point.”

Laijawala, who predicts the Sensex will end the year at 24,000, favors companies most-tied to the economy such as ICICI Bank Ltd., India’s second-biggest lender, and Bharat Forge Ltd. (BHFC), the third-largest auto-parts maker by market value.

Per-share earnings in the Indian stock index will probably climb 23 percent in the year ending March 2015, according to the average of 10 strategist estimates compiled by Bloomberg.

While the Sensex trades at premium over the MSCI BRIC index, the Indian gauge is still 21 percent cheaper than its level in November 2010, the last time it was climbing to record levels, according to data compiled by Bloomberg.

“Markets are at all-time highs but valuations are not,” Gautam Chhaochharia, the head of research at UBS Securities India Pvt. in Mumbai, said in an interview on March 26. “There is room left.”

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net Ravil Shirodkar

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