In all probability, Dalal Street [Get Quote] will end up having a blast this Diwali. With the Sensex crossing its all-time peak and closing at 12,736 points last Friday, the stock markets seem well poised to usher Samvat 2063 in the special trading session on October 21 with much fanfare.

As on Friday, Samvat 2062 has been a terrific year - the BSE Sensex has gained 58 per cent over previous Diwali. Looking ahead, market experts are unanimously bullish on Samvat 2063. The Smart Investor takes a look at what happened in Samvat 2062 in the stock markets and what to expect next year.

Our experts believe that the buoyant macroeconomic factors, surging corporate performance and changing perception of global investors will be the key drivers next year. They also think that valuations are far from bizarre and tell us of sectors and stocks they think look promising in the coming year.

Samvat 2062: Status report

Samvat 2062 has been among the best performing years over the last decade. Backed by the infrastructure boom, encouraging corporate earnings and a stable political environment, the markets witnessed a broad-based rally across sectors.

While large-cap stocks did well, mid-caps and small-caps underperformed, clocking returns of 38 per cent and 26 per cent gains respectively. Engineering, the best performing sector pocketed 78 per cent returns. Auto, and oil and gas were other star performers with 59 and 56 per cent gains respectively.

"Strong corporate earnings, reasonable interest rates and well calibrated valuations defined the market performance. A trouble-free political environment was an added advantage," says Raamdeo Agrawal, joint managing director,  Motilal Oswal Securities. 

Shriram Iyer, head-research at Edelweiss Securities also agrees, "While GDP growth translated into corporate earnings, favourable demographics and infrastructure investments improved visibility of the India story. Stable political backdrop further supported the markets."

Yes, the markets did go through a deep correction when the Sensex declined 31 per cent between May 11 and June 14 this year. But even in that time, the increasing confidence of retail investors is noteworthy.

"Keeping faith in the broad-based and fundamentals-driven market rally, retail investors remained unfazed even during the market fall in May. The composed moves of retail investors were one of the factors that marked the success of the past Samvat," says Nilesh Shah, chief investment officer, Prudential ICICI Mutual Fund.

Samvat 2063: What to expect?

Market analysts agree that while the major market drivers will remain the same, perception of investors will make a difference. India is going great guns thanks to encouraging macroeconomic factors and corporate performance.

Now the rising confidence with which global investors perceive the reality of the India story will catapult the bourses to newer heights, say market experts.

"Further, infrastructure investments and corporate earnings will continue to drive the markets. A lot will also depend on how the US slowdown pans out," adds Agrawal. However, there seems to be no worries over the earnings growth outlook.

"For the last 16 quarters, corporate earnings have grown in excess of 25 per cent. With India expected to grow its GDP at 7-8 per cent, we expect corporate profits to grow at an average of atleast 15 per cent; which promises a decade long compounding opportunity in equity markets," says Bharat Shah, CEO and managing partner, ASK Raymond James Securities.

Kotak Mutual Fund's president, Nilesh Shah, is even more bullish: "India should delineate itself from the emerging markets and move to the top league of rapidly developing economies. Being one of the fastest growing free market economies, India needs to be classified amongst the top international markets."

Valuations

Despite the staggering levels of the bourses, which have propelled the trailing 12-month Sensex P/E to 22.09, and the increased volatility, analysts and market players don't find the valuations unreasonable. 

"If we look at FY07 earnings estimates, the Sensex trades at 17x, while the BSE 100 and the BSE 500 are reasonably valued at 12.5x and 10x. From a short-term perspective  Sensex looks reasonably priced, however real value opportunities are available in high quality mid-cap stocks which are genuinely underpriced. Investors need to make the right picks and stay invested in the long-term and forget short-term hiccups," adds ASKRJ's Shah.

While large-caps stocks would continue their northward march, experts feel select mid-caps promise much better returns. "Most mid-cap companies are expected to post much better growth numbers in the coming quarters. We think India is a selective mid-cap story and investors need to pick the right ones while keeping enough leeway for bad news in the markets," says Amitabh Chakraborty, head-research, Brics PCG.

"About 35 per cent of the BSE 500 stocks are still laggards and quite a sizeable number of these stocks offer good investment opportunities. Mid-cap companies are already picking up and we expect good growth numbers from them, but we see them performing better in the second half of the Samvat," says Anish Damania, head-research, Emkay Shares and Stock Brokers. 

Sectors and stocks

Market experts advise investors to look at infrastructure, cement, automobiles, banks, technology and oil marketing companies but with a word of caution. The idea is to pick the right companies with sound business model, comfortable valuations and good earnings prospects. 

Analysts feel investors should stay away from sugar stocks as they face pricing and exports pressures. Retail companies too seem to command crazy valuations.

Anand Rathi, managing director, Anand Rathi Securities, says, "We are bullish on technology, textiles, hotels, banking, infrastructure, cement and FMCG sectors. However, we advise investors to be cautious with airlines, power and agri-product companies. Infosys [Get Quote], Reliance Communication, Centurion Bank of Punjab [Get Quote], Bharat Electronics [Get Quote], Orient Paper, Shree Cements [Get Quote], Royal Orchid Hotels [Get Quote], Century Textiles [Get Quote], Bajaj Auto [Get Quote] and Crompton Greaves [Get Quote] are our top 10 picks."

The upturn in the cement cycle is likely to continue for a couple of years till new capacities start coming up. Firm prices will chip in good numbers for cement players.

Most automobile companies have come out with excellent sales numbers and analysts feel they will do much better in the coming quarters. While banks will benefit from stable interest rates and rising operating incomes, oil-marketing companies will benefit from softening of crude prices.

"While engineering, technology, textiles and cement stocks are our favourites, we think banks and oil companies will also do well. We are bullish on a host of frontline and mid-cap banking and technology stocks. In auto ancillaries, we like Amtek Auto [Get Quote], Amtek India [Get Quote] and MICO, and Greaves Cotton [Get Quote] and Cummins look promising in diesel engines segment. In textiles, we like integrated players like Nahar Industries, Bombay Rayon and Mahavir Spinning Mills," says Emkay's Damania.

Chakraborty likes a slew of stocks in both the large and mid-cap segments. He says, "Among frontline stocks, we like ITC, Reliance Industries [Get Quote], ICICI Bank [Get Quote], Bajaj Auto, Mahindra & Mahindra, ACC and NTPC.  Some of the mid-cap stocks that we are bullish on include Mangalam Cements, KS Oils [Get Quote], IVRCL Infraprojects, Venus Remedies [Get Quote] and Pantaloon [Get Quote] Retail."

Interest in stock markets is once again rising, and the hiccup after May 2006 seems to be behind us. Samvat 2063 will begin with optimism, and market players have set expectations that India Inc will deliver the numbers.

However, as the markets are high right now, analysts advise that investors should exercise caution and remain stock-selective.