The Indian Economy in new regime: ZyFin Capital

With a stable political environment over the next 5 years, India’s country risk will also reduce in the times to come

May 26, 2014 4:50 IST | India Infoline News Service
The decisive majority will lead to political stability and thus a functional Government. TheNDAs track record during 1998-2004 was impressive in terms of bringing about reforms which have had a long impact on Indias growth.

The biggest advantage to corporate India will be faster decisions based actions by the new Government, leading to an economic recovery which in turn has already enthused investors. We are in effect moving into a new realm where the long term average of the markets will get redefined. This is because markets are a function not just of earnings but a combination of sustainable earnings along with positive sentiment and confidence. Though earnings may take time to reach the pre-2008 levels, the medium term traction will continue with the strong push by the government to reform and remove some of the impediments the economy has faced recently.

With a stable political environment over the next 5 years, Indias country risk will also reduce in the times to come. This will meaningfully help in attracting foreign capital, both FII and FDI. We believe that this a very significant reason for the re-rating of Indian equities.

With most expecting India's GDP to grow at 5.5% in FY15e and 6.5% in FY16e, we are of the view that most macro parameters will show improvement over the next 12-24 months, which will eventually lead to policy rate cuts, which again will re-rate equities.

The current market valuations are at 14x to 15x forward earnings vs. the LTA of 15.8x. Depending on the reform trajectory and macro recovery, we believe markets could sustain the positive momentum in long run.

Sectors we believe have a positive outlook are Education, Infrastructure, E&C, Power and Housing Finance.

One has to be cognizant that the overhang of lack of decision making and the expanded government expenditure over the last 5 years will lead to short term pain to be sailed through before we can see the real benefit of the action taken by the Modi led Government.

The author isChairman, ZyFin Capital

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