Investors are turning cautious on pricey Indian shares as the new financial year kicks off, unsure whether earnings results due in about two weeks would back the high valuations. Even though the longer term outlook remains upbeat, there is a likelihood of profit-taking taking precedence to cool the exuberance.

The rollover of futures monthly contracts on Thursday indicated wariness, with only 65 per cent of positions moved to the April series as against an average 71 per cent over the past three months. The cost to rollover positions fell sharply to around 45 basis points as traders were less than willing to shell out more with the markets hovering near all-time highs.

“There is resistance building up,” said chartist Kanu Dave. “People do not want to be overextended at these levels. It is a precaution — you need to pause and take a long breath for the long run.”

The Nifty-50, which hit a record 9,218.40 on March 17, closed at 9,173.75, up 12.1 per cent over January-March, its biggest quarterly gain since April-June 2014. The top-30 Sensex climbed 11.3 per cent over the quarter to 29,620.50.

For the April-March financial year, the Sensex was up almost 17 per cent and the Nifty-50 rose 18.5 per cent.

The underlying trend is bullish and the market will scale new highs on the back of stronger growth, Dave said, but there will be a consolidation phase after every big jump. “We need some new triggers for the market to take the next leap.”

The stocks rally, which also took the Sensex within hand-shaking of its all-time peak, was fuelled by expectations that the massive election victory for Prime Minister Narendra Modi’s Bharatiya Janata Party in Uttar Pradesh, India’s biggest state, would embolden New Delhi to press ahead with radical reforms.

The government has succeeded in breaking the logjam to roll out from July 1 the Good and Services Tax (GST), the biggest tax reform since the country’s independence from British colonial rule in 1947. Over time the GST would lower the cost of manufactured goods, allow freer movement of products across the country and help eschew the cobweb of state, municipal and local taxes.

Ironically, while the GST heralds India’s acceptance of a common market for the subcontinent, London has begun the process to exit the European Union.

Foreign interest

Overseas investors are looking at investment opportunities in India, drawn by the huge growth potential in a country with more than 1.2 billion people and improving living standards.

This week a group of investors led by KKR & Co and Canada Pension Plan Investment Board bought a 10.3 per cent holding in Bharti Infratel Ltd, a telecom infrastructure firm, for more than $950 million.

Bharti Airtel, India’s largest mobile operator and the parent, controlled by billionaire Sunil Bharti Mittal, sold the stake to help pare its debt, the company said.

The telecom sector is seeing feverish consolidation to face severe competition from Reliance Jio, the mobile services launched by energy conglomerate Reliance Industries Ltd, controlled by Mukesh Ambani, India’s richest man. Vodafone Plc’s India unit has reached a deal with Ideal Cellular to combine their operations to fight both Airtel and Jio.

Backed by strong foreign investors Bharti Infratel is looking to acquire Vodafone’s 42 per cent stake in rival Indus Towers. Idea could also divest its holding in the towers business.

“We see Bharti Infratel driving the consolidation process,” Rajiv Sharma, telecoms analyst at brokerage HSBC, said in a report. Vodafone and Idea are likely to be keen to monetise their Indus stakes to reduce debt and invest more aggressively in 4G network upgrades to counter Jio, he added.

Chinese smartphone maker Xiaomi Corp has pledged to invest another $500 million in India over the next three to five years, after spending a similar amount since its entry into the subcontinent two years ago, betting on strong appetite for phones in a country where more than half the population is below the age of 35.

Significantly, domestic savings are increasingly being channelised into equity and debt markets, providing a strong push to share prices.

“I am expecting at least $100 billion from Indian households net fresh equity flow into Indian markets in the next 18 months,” Porinju Veliyath, chief of Equity Intelligence India, told ET Now television channel.

Bets for 2017-18

Brokerage Edelweiss Securities believes diversified Reliance Industries Ltd is a good buy and has set a one-year target price of Rs1,450. The stock closed at Rs1,320.90 on Friday, rallying 22 per cent in three months, on hopes the company’s fourth-generation mobile data services would boost profitability.

Reliance has invested more than $20 billion to build a nationwide optic-fibre network and acquire radio waves. The mobile services were formally launched last September and within a short span it has signed up more than 100 million subscribers. From April it would begin charging for the service, prized attractively to shake up the sector.

While the telecom initiative offers strong value proposition in voice and data segments, Edelweiss said, the gradual uptick in oil prices bodes well for the company, which owns the world’s largest refining complex in Jamnagar, Gujarat. “Lastly, with its capex program coming to an end, we expect profits to double in five years, while valuations remain attractive,” the brokerage said in a report.

Edelweiss has recommended investors to buy state-controlled Power Finance Corp, the leading finance backer for power projects, saying that a reform package for ailing state electricity boards has been a “resounding success” and enables the company to grab a lion’s share of the funding needs for new investments. It has set a target price of Rs190, compared with Friday’s close of Rs145.90.

It has also picked private-sector KEC International, a power transmission tower maker and engineering company, seeing scope for margin improvement from its comparatively new businesses such as railways electrification contracts and solar. The stock, which closed at Rs208.60, is expected to reach Rs250, it said.

Motilal Oswal Securities has identified Tata Motors, Shiram City Union and Kotak Mahindra Bank among its picks.

For Tata Motors, it has set a price target of Rs653, supported by an expected recovery in margins as the company has lined up a series of new launches of its marquee brands Jaguar and Land Rover. “We estimate 134 per cent consolidated EPS (earnings per share) CAGR (compounded annual growth rate) over FY2017-19,” the brokerage said in a research note. The share closed at Rs465.85.

Shriram City, a retail-focused finance firm with a strong presence in rural regions, should also improve profitability as it leverages on the strength of its sister concern, Shriram Chits, to source its clientele and moderate incremental provisioning. It has a price target of Rs2,500, compared with Friday’s close of Rs2,359.70.

The brokerage expects Kotak Mahindra Bank shares to reach Rs940, up about eight per cent from current levels, riding on strong loans growth and accelerated pace of customer acquisition through digital initiatives.

ICICI Securities is upbeat on State Bank of India, with a price target of Rs310, Kajaria Ceramics with a target of Rs600 and paints maker Kansai Nerolac with a target of Rs415.

The writer is a journalist based in India