Mumbai: India’s stock markets rose sharply on Wednesday on expectations of good results from companies for the quarter ended 30 September, the second of fiscal year 2009-10 for most companies, and a statement from a government official that the country would continue to divest some of its stake in some public sector companies.

Upward swing: The BSE Sensex on Wednesday topped the 17,000-mark for the first time in 16 months. Punit Paranjpe/Reuters

Interestingly, Asian markets ended flat, and European markets, marginally up. The Dow Jones Industrial Average was trading over 100 points down at 9,600 levels at 8pm India time.

The Bombay Stock Exchange’s Sensex closed at over 17,000 for the first time in 16 months. Meanwhile, state-owned oil company Oil India Ltd (OIL) made a debut at a premium on the exchange. The Sensex gained 273.93 points, or 1.63%, to close at 17,126. 84. The broader Nifty index of the National Stock Exchange gained 77.10 points, or 1.54%, to end the session at 5,083.95.

Shares of OIL, despite a relatively high offer price of Rs1,050, listed at a premium of 8.16% at Rs1,140.55 each—the best performance in terms of listing premium by any company raising Rs100 crore or more this year.

Speaking at the listing ceremony of OIL, S. Pradhan, joint secretary, ministry of disinvestment, said: “We are hoping to bring at least six-seven issues to the market. In the worst case, we will see at least four-five issues by 31 March 2010."

Graphics: Paras Jain / Mint

Initial offers such as these would have no problems, said the lead manager of the OIL issue. “Liquidity continues to remain high. I don’t see any problems in the IPOs (initial public offerings) sailing through," said Kamal Yadav, executive director at Morgan Stanley, a book-running lead manager for the OIL issue.

The Sensex’s rise over the past seven months has been fuelled by liquidity. Foreign institutional investors (FIIs) have bought stocks worth $12.13 billion (Rs58,224 crore) till 29 September, according to data provided by capital market regulator Securities and Exchange Board of India. On Wednesday, FIIs bought stocks worth Rs1,074 crore, net of sales, according to provisional figures from the National Stock Exchange.

The liquidity has helped the index double over these months, despite weak earnings reported by companies. And the rise has, in turn, attracted more investors. The current spurt is because the market expects the second quarter results to be better, said an analyst.

“Also, with the imminent Diwali season, a lot of retail investors have started participating (in the market)," said V.K. Sharma, head of research at Anagram Stockbroking Ltd. Diwali is a Hindu festival that sees people buying gold and stocks in some parts of the country.

Sharma labelled the possibility of a correction unlikely because the rise has been steady and “advance tax figures are better than expected, which too indicates better profitability this quarter".

Mutual funds that were content to preserve their cash through the fall of the Sensex since January 2008 have trimmed their cash positions and re-entered the market. According to provisional data from stock exchanges, domestic institutional investors, including mutual funds, bought stocks worth Rs159 crore on Wednesday.

Current conditions are conducive enough to see the Sensex crossing 18,000, said another analyst. “Most companies are expected to protect their margins this quarter. These positive signals coupled with low interest costs and continued strong foreign fund flows collectively may drive the markets past 18,000 mark," said Manish Sonthalia, portfolio manager, Motilal Oswal Financial Services Ltd.

Still, the liquidity-driven rally has raised concerns of unrealistic valuations among some other analysts.

According to a comparative study by Crisil Equities, the current rally of at least 2,400 points in the Nifty in the past seven months has been the fastest rise ever in the history of the Indian stock market. “The rally has taken the one-year forward (share) price to earnings (per share) valuation from lows of 10x before the start of the rally to the current level of 19.5x. During the previous rally, the market was quoting at a price-earnings (multiple) of 18.6x when the economic outlook was strong," said the study.

The improved performance of the stock markets comes in the background of healthier economic indicators.

Factory output of six core industries—having a combined weightage of 26.7% in the Index of Industrial Production—registered a growth of 7.1% in August this year, compared with 2.1% in August 2008.

Some fund managers also say the rally should be seen in the context of the steep fall following events on Wall Street last September, when foreign investors panicked and sold Indian shares, though there was nothing fundamentally wrong in them.

Ajit Dayal, president of Quantum Asset Management Co. Pvt. Ltd, said: “The market is justified in doing what it is doing now. Many of the sell-side analysts are way behind the curve. They are still seeing only a 3-4% growth in earnings of Sensex companies. But we expect a 20% growth by March 2010, driven by both volume growth and profit growth."

Companies will start declaring their earnings for the quarter ended September next week. Software firm Infosys Technologies Ltd will declare its results on 10 October and its performance and guidance will be closely watched, said analysts.

Not everyone, however, is sanguine about the prospects of the market.

Amitabh Chakraborty, president (equity) at Religare Capital Markets Ltd, said he is concerned about the speed of the rally. “The market has factored in strong Q2 (second quarter) numbers, but one could expect positive surprise from Reliance. October is a short month, and one would be wary of the latest move in the index, which has been very fast," he said.

According to him, redemption pressure on hedge funds has been increasing as the one-year moratorium that came into effect last October is just getting over. “Based on the cues from the US, one would not be surprised to see a correction of about 10%, to say 4,600 Nifty by end of October, which is healthy in our view."