Sensex, Nifty May Hit Pause Mode After 25% Gains

Indian stock markets have been on a roll in 2014, rising nearly 25 per cent on the back of $12 billion fund flow into equities. Only last week, the Sensex and Nifty hit successive record highs for three straight days before falling on Friday.

Many analysts have talked about an impending correction in stock prices, but their predictions have not fructified so far. Independent analyst Sarvendra Srivastava has been negative on markets for the last month or so and expects the 50-share Nifty to fall to 7,000 from around 7,800 currently.

"Markets don't have the wherewithal to climb. Global setups have also deteriorated and if the Dow Jones falls, there could be a sharp correction in Indian markets," said Mr Srivastava, who remains bullish from a long-term perspective.

Deficient monsoon continues to be the big headwind for Indian stocks. The country's growth could be just 5 per cent in FY15, down from earlier estimates of 5.4 per cent, if drought becomes a reality, Bank of America Merrill Lynch estimates.

However, there has been some positive news on the monsoon front with seasonal rainfall deficit coming down to 25 per cent of normal (from a peak deficiency of 43 per cent) towards the end of the sowing month of July. Although rains have spurred sowing, cropping is still lagging behind at 75 per cent of normal.

Indranil Sen Gupta of Bank of America Merrill Lynch says the three crops whose prices flare up due to poor monsoon - pulses, oilseeds and raw cotton - are doing badly. Rains in western and southern India will be crucial as the rivers are running low, he added.

Though most brokerages continue to be bullish on Indian equities, the exuberance seems to be tempered after the recent run. Goldman Sachs, which has a 12-month Nifty target of 8,600 points, says further gains will be "less sharp, more earnings driven and contingent upon reform execution."

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Demand/supply balance may turn less favourable given government's divestment targets and upcoming equity raisings, Goldman said, adding that average stock valuations are highest across Asia.

Jyoti Jaipuria of Bank of America expects Sensex profit growth to pick up to 18.3 per cent in the June quarter from 10 per cent in the March quarter, which suggests that the worst is over for Indian corporates. However, his end-December 2014 Sensex target at 27,000 leaves little room for upside from current levels.

UBS also expects markets to consolidate after the run-up but says significant downside may be limited.

"We remain bullish on Indian equities as current valuations are not expensive in our view and growth recovery hopes will likely ensure premium valuations. Our Nifty target for end-2014 is 8,000," said Gautam Chhaochharia, head of India research at UBS Securities.

The consensus now seems to be in favour of a prolonged consolidation unless the government moves swiftly to revive the capex cycle and announces long-pending labour reforms.