On the road to the discovery of India, 8000 is just another milestone. If India Inc keeps up the good work and the rain gods are merciful, the Sensex could be at far higher levels.
Of course, it certainly has run up very fast, and there's no doubt that it has been propelled by liquidity inflows. The question now is -- will the inflows continue?
One way of answering that question is to look at valuations. At 8000, the Sensex trades at a price to earnings (P/E) multiple of just about 15 times estimated FY05 earnings and 13. 3 times estimated FY06 earnings.
Compare this with India's peers in the region. South Korea trades at 10.7 times CY05 while Taiwan trades at around 13.7 times CY05. But these multiples need to be seen in the context of earnings growth.
According to one study, India's earnings growth for FY05 has been pegged at 20 per cent, for Taiwan it is 7 per cent in CY05, while for South Korea the growth is a negative 15 per cent. Taking the PEG (Price to Earnings to Growth) ratio, therefore, India does not look that expensive.
There are other justifications. One of them is that the Indian economy is not only one of the fastest growing economy in the world, the growth is perceived to be sustainable.
India is far less dependent on exports and has a huge domestic demand which companies can cater to, which means that it is better equipped to weather a global downturn. The universe of stocks that investors can buy into is large, diverse and offers quality.
Indian companies have strong balance sheets, have built global-scale capacities and demonstrated their ability to deliver numbers, consistently.
Given this, India's market capitalisation which is nudging $500 billion, does not probably reflect the nation's growth potential.
As a percentage of the world's market capitalisation, India accounts for less than 2 per cent. One reason for this is that the free float is relatively small because of which India's weightage in indices such as the MSCI, is relatively small.
As a result, fund managers who rely on such indices to make allocations end up allocating smaller amounts. With more and more foreign investors discovering India, there has, however, been a flood of money into the country.
While this may have pushed up valuations from a near-term perspective, one shouldn't lose track of the big picture. India is no longer simply the flavour of the season, it's far too important a market to ignore.
Any fund manager who has stayed away has already paid for it dearly -the Indian market is up 28 per cent between January and now and up a whopping 55 per cent since last September. So long as the money keeps coming into funds abroad, an increasingly larger chunk of it should come to India.
With contributions from Shobhana Subramanian and Amriteshwar Mathur.