Indian Stocks to Extend Record Rally on Earnings, Franklin Templeton Says

India’s more than 20 percent growth in earnings and slowing inflation will spur further gains in the nation’s equities after the benchmark stock index surged to a record, according to Franklin Templeton Investments.

HDFC Bank Ltd. and Axis Bank Ltd. are among the country’s most “high quality” bank investments as loan growth reaches as much as 25 percent a year, said Sukumar Rajah, who oversees $4 billion as Franklin Templeton’s chief investment officer of Asian equities. Inflation is “under control” after the Reserve Bank of India raised its benchmark interest rates last week for the sixth time this year, he said.

The Bombay Stock Exchange Sensitive Index has jumped 20 percent since December and hit an all-time high Nov. 4, the last full day of trading, as foreign investors bought Indian equities at a record pace this year on speculation economic growth will boost corporate profits. The 30-stock gauge is valued at 17.9 times analysts’ 12-month earnings estimates, the highest level among the world’s 30 biggest markets, according to data compiled by Bloomberg.

“The markets generally will continue to go up,” Rajah said in a Nov. 3 interview in Warsaw. Indian stocks will move in line with other emerging markets, he said. “We are looking at some high-quality banks.”

HDFC, India’s third-largest bank by market value, reported profit jumped 33 percent in its fiscal second quarter, according to a company statement dated Oct. 19 on its website. The shares have rallied 40 percent this year, and trade at 35 times reported earnings. Axis, which is valued at 24 times profit, posted a 38 percent jump in earnings. The fourth-biggest lender has surged 56 percent this year. The MSCI Emerging Markets Financials Index, a global gauge for the industry, trades at 16 times earnings.

GDP Expansion

India’s gross domestic product expanded 8.8 percent in the three months through June, the most among major economies in Asia after China. The Reserve Bank of India probably won’t raise interest rates in the next three months, Governor Duvvuri Subbarao said on Nov. 2 after increasing the repurchase rate by a quarter-point to 6.25 percent. Consumer prices for industrial workers in India rose 9.8 percent, down from a 16 percent increase January.

“It is quite unlikely the central bank will raise rates more,” Rajah said. “We are quite close to the peak right now -- inflation is under control.”

IPOs

India’s expanding economy has helped companies to raise $7.7 billion in initial public offerings for businesses ranging from consumer manufacturing to jewelry retailers this year, according to data compiled by Bloomberg. That’s almost double the $4 billion raised in 2009 and the most in three years.

Coal India Ltd., the world’s No. 1 producer of the fuel, surged 40 percent to 342 rupees in its first day of trading on Nov. 4 after selling 152 billion rupees ($3.4 billion) of shares at the top of the price range in the country’s biggest IPO in at least a decade, according to data compiled by Bloomberg. The offering attracted bids worth at least $48.7 billion.

“The supply of new stocks is good for the market at the current juncture because it’s keeping the lid on prices,” Rajah said. “Right now the market is not overvalued but if a lot of money keeps coming in and there is no supply it can get overvalued.”

Even after this year’s gains, the benchmark Sensex index is still 15 percent cheaper than in January 2008, when it traded for 21 times earnings estimates, according to data compiled by Bloomberg. The Sensex’s price-to-book ratio of 3.7 compares with its earlier peak level of 6.2, the data show.

Franklin Templeton’s Franklin India Prima Plus Fund has returned 24 percent as of Nov. 4 since the start of 2010 compared with the Sensex’s 20 percent gain.