Mumbai: One out of every 10 stocks in the BSE-500 index is trading at its lifetime high even as the Sensex, India’s bellwether equity index, is about 3,000 points, or close to 14%, shy of its historical peak.

This bunch is led by auto and banking stocks, which have declared some of the best earnings in the past four quarters. Auto and banking are sectors that reflect the resilience of the Indian economy and the domestic consumption story, a favourite theme among fund managers.

While the markets have by and large shrugged off the poor earnings season, it is the profit that matters when it comes to attracting investors and boosting stocks prices.

Sustained earnings growth has made these firms attractive to foreign institutional investors (FIIs), the main driver of the Indian market. The BSE Auto Index is trading at 14.8 times 12-month trailing earnings and the Bankex index at 17.1 times. In comparison, the Sensex has a price-earnings multiple of 21.51.

“All-time highs are a function of flows and we have been seeing strong flows over the past couple of weeks," said Sanjeev Patni, president and head of institutional equities at Prabhudas Lilladher Pvt. Ltd. “Earnings for the past few quarters are the major driver for FII inflows."

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FIIs have been net buyers in July with $3.78 billion (Rs17,425 crore today) of equity investments, the second highest inflow in a month this year after a $4.1 billion inflow in March. They have already pumped in close to $10.5 billion in the first seven months this year, comparable with the inflows India received in 2007 for the same period. In that year, India received the highest inflows of around $17.8 billion.

One out of every six Sensex stocks and eight Nifty firms have been trading at their all-time highs in the past fortnight. The Nifty consists of the 50 most liquid stocks traded on the National Stock Exchange. All Sensex firms are part of the Nifty.

A Mint study shows that 54 firms in the BSE-500 have scaled lifetime highs in the past week and 14 in the week preceding that. The BSE-500 index represents 93% of the total market capitalization on the exchange.

For these 68 firms, average FII holding has increased by 70 basis points in the three months ended June from a quarter ago. In comparison, the FII holding in BSE-500 firms has decreased by six basis points.

One basis point is one-hundredth of a percentage point.

With the economy forecast to grow at 8.5% this year by the Reserve Bank of India and increasing personal incomes expected to drive demand, analysts and fund managers expect these sectors to dominate for some time and the rally to continue.

Automobile sales in India touched a record high of 1.23 million in July after growing at nearly 30% in the previous three months, data from the Society of Indian Automobile Manufacturers showed on Monday. Two-wheeler maker Bajaj Auto Ltd’s profits in the past three quarters grew at least 100% over the year ago period and FII holdings in the firm increased 77 basis points in the June quarter.

“The volume growth in auto looks fantastic," said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a global fund registered as an FII in India.

While there could be some stock-specific corrections in the auto sector, analysts and fund managers are pretty bullish on banking and financial services.

The current rally has been largely led by mid-cap public sector banks, though some such as Axis Bank Ltd—which saw a 3.1% increase in FII holding—has scaled previous peaks. The bank reported profit gains of at least 30% in the past three quarters.

Indian banks have become more attractive to global buyers now as their balance sheets look much cleaner and healthier compared with peers abroad, especially after the troubles that banks in smaller European economies have been facing.

“The resilience of the Indian banking system is extraordinary compared to the rest of the world," said Bhat. “Besides, margins are likely to improve as interest rates are moving up and re-pricing of deposit rates usually take time."

“Once the 52-week highs are crossed, the market usually expects further appreciation and the rally in mid-caps looks set to continue for some time," said Harindra Kumar, head of research at Elara Capital Plc.

Barring inflation, all other macro data are favourable at this point, but the June quarter earnings of Indian firms have generally disappointed analysts. The collective profit for 2,151 firms that have declared their earnings so far has declined 8.92% in the three months ended June from a year ago.

Despite this, most analysts are still forecasting 20% earnings growth this fiscal and robust FII inflows for a broader market break-out from current levels.

The Sensex closed 143.51 points, or 0.79%, higher at 18,287.50 on Monday. Its lifetime high of 21,206.77 was reached in intraday trade on 19 January 2008.

“We stand by our estimate of 22,680 for the Sensex by the year end," said Murali Krishnan, director (research) at Ambit Capital Pvt. Ltd. “We expect sectors like cement, real estate and print media, underperforming for sometime now, to bounce back in the coming quarters driven by better earnings numbers."