India Stocks Set to Gain Further as Earnings Rebound

Oct. 16 (Bloomberg) -- India’s stocks are in a “sweet spot” as profits rebound and may drive the benchmark index 13 percent higher by the end of next year, Morgan Stanley said.

Earnings for companies in the Bombay Stock Exchange Sensitive Index will gain 15 percent in the financial year ending March 31, 2010, and 23 percent in the next 12 months, Morgan Stanley analysts Ridham Desai and Sheela Rathi wrote in a report yesterday, increasing earlier estimates of 10 percent and 20 percent. Profit growth may boost the Sensex to 19,400 by the end of 2010, from yesterday’s close of 17,195.20.

The Sensex, the 10th best performer among 90 benchmark indexes tracked by Bloomberg globally, has rallied 78 percent this year. Bajaj Auto Ltd., India’s second-largest motorcycle maker, said yesterday net income more than doubled to a record in the second quarter after it introduced new models and exports surged. HDFC Bank Ltd., India’s third-biggest bank by market value, said on Oct. 14 second-quarter profit rose 30 percent.

“Indian equities could be volatile in the near term, since a lot of the next six months’ projected growth is already in the price,” the analysts wrote. “Investors should use such volatility to buy Indian shares, since the growth outlook for the next 12 to 18 months remains firm and is still not priced into equities.”

Gross domestic product in the year to March may grow 6.4 percent, higher than an earlier estimate of 5.8 percent, Morgan Stanley said this week, citing a faster-than-expected recovery in industrial production.

“We reckon that Indian equities could be in a sweet spot with low institutional ownership, strong liquidity, prospects of growth and earnings upgrades, strong corporate balance sheets and stable politics,” the analysts said.