Is sensex 5,500 in sight? Or even-who knows-6,150, February 2000's all-time high? With India's key stockmarket index having blasted its way up these past five months, it's not a silly question anymore. Why, the markets even shrugged off the world's dollar shudders in September, suggesting a strong case for an upturn based on unalloyed domestic logic.

When corporate chiefs mention the U-word these days, they mean 'U-turn' more than 'uncertainty'. Corporate performances, good so far, are likely to go up; and the Indian economy, having logged a reassuring 5.7 per cent in 2003-04's first quarter, is likely to outpace 6 per cent for the entire fiscal year (6.5 per cent is what most projections say).

The real story, however, lies in valuations. Look at it this way. The Sensex's rise from about 2,967 at the start of May to around 4,455 at the start of October may have been a dizzying experience. But the composite p-e ratio-the figure that's more indicative of 'value for money'-of the 30 Sensex stocks has risen only from 12.91 to 16.22 over the same period.

Two things stand out. One, the index's ascent has been accompanied by a steep increase in corporate earnings. And two, an index P-E in the mid-teens is still attractively modest- both by historical and global comparisons. In fact, 16.22 is still less than the index's p-e back in January 1991, and less than half the 40s seen during the boom of 1994.

So if valuation is your yardstick, there's still a way to go. Indian stocks, by and large, are selling cheaper than their earnings would justify. Expect a much slower ascent from here on, though (the fastest rallies are always at the beginning of an upturn), punctuated by plenty of dips.

Scam Proofing

If you instinctively narrow your eyes each time you hear someone trying to justify the sustainability of higher p-e ratios (a steep 'earnings growth' trajectory is the current expectation doing the rounds), you're not alone. During the 1999-2000 rally, the wonders of the 'new economy' were said (or rather, hoped) to be defying the old trends to usher in a new era of super-P-Es. It all ended in one big eye-patched disaster, a resounding market crash and the Ketan Parekh episode, reviving instant memories of the inglorious Harshad Mehta bull phase of 1992, when bank funds were funneled illegally into stocks. This grand 'reforms' rally also ended in a big crash, with a lot of fuming investors.

"The market is buoyant. We are only in the first phase of the rally and there is still a lot of value left" Rakesh Jhunjhunwala, Bull of the season

So, there, sniffing around for another scam-in-the-making is not entirely an irrational response to the current bullishness.

The market watchdog, SEBI, would like to reassure the market that this, at last, is a genuinely scam-free rally. Safe for the retail investor, to the extent possible. To be able to do this, SEBI has been particularly active-some say hyperactive-these past few weeks. It has been wielding regulatory norms at market players, sifting data for signs of market manipulation and wagging a finger at mutual funds for 'front running' (at least 10 funds have been cautioned against this form of insider trading that involves the personal purchase of a stock just before a big order is placed).

"This rally is much more broad-based than the previous ones," assures SEBI Board Member, T.M. Nagarajan, "and chances of a scam are far less. However, we are keeping a strong watch on every segment of the market."

The Association of Mutual Funds of India (AMFI), meanwhile, is doing its own bit to keep rogues out, according to AMFI Chairman A.P. Kurian. Other recent measures include the BSE's shifting of some 690 stocks to the 'Z' category of trading. Clamps have also been imposed on nine fairly well-traded stocks, including many from Ketan Parekh's infamous K-10 list, as part of a "preventive surveillance measure" in the words of Rajnikant Patel, COO, BSE.

Is any of this helping the rally? Rakesh Jhunjhunwala, a big bull operator for the season, certainly thinks so. "I am 101 per cent sure that the rally is clean," he avers.

Hot Money Habituation

The other worry is 'hot money', often ascribed to FIIs scouring the planet for a quick buck (as the dollar softens). Indeed, FII funds have played a big role in the current boom-their inflows this year in September alone of $836.4 million exceed the $772.2 million in all of 2002-but the real issue may well be the immaturity of the Indian derivatives market, and the arbitrage opportunities it has presented to FIIs. The prevalent trick is to buy stock in the cash market and sell in the high-premium options market.

"It is a known fact that FIIs are into arbitrage," groans Abhay Aima, Country Head (Equities & Private Banking Group), HDFC Bank, pointing to the volatility created by the large sell-offs that occur on the last Thursday of every month ('triple-witching' day, the last trading day before contract expiry).

"Domestic consumption has picked up, and cost-cutting and restructuring are yielding dividends " S. Naganath, DSP Merrill Lynch Fund Manager	"We see more retail investors investing this time, and they are well informed about the stocks" Deena Mehta, ACM Investment Intermediates

Hedge funds present another sort of worry, since these are short-term investors that are the likeliest to hit the exit button once their targeted returns have been realised. Of course, this behaviour extends to several small-time domestic traders as well-and they've made a comeback, judging by the boom in penny stocks. "We have a couple of clients who only trade in such stocks, and do not know what the company's product is or the management," gushes Mitesh Mehta, Director, K.G. Vora, a stock brokerage K.G. Vora Securities. There are over a thousand penny stocks turning active, with stocks being sold at a few paise apiece in bundles of a million. The rise in their prices, sighs Bharat Kotecha, Vice-President, Investors Grievance Forum, has nothing to do with their business performances. In other words, the market has again started attracting the sort who treat the whole show as some sort of casino, with money to be made spraying it around the place.

But then, hot money is a reality in every rally, and there's no point railing against quick-buck seekers. If a market is headed up, it's headed up.

Risk Rewarding

How far will the rally go? Jhunjhunwala is evasive on his Sensex target, but sees 4,500, the current level, as a major support plank. "The market is buoyant," he exults, sipping lemon tea, "and we will definitely break out of the 10-year range. We are only in the first phase of the rally and there is still a lot of value left." His favourites-of which he reels off CRISIL, Matrix Labs, Titan, Ashok Leyland, Corporation Bank, BEML and KPIT Cummins-are already the buzz on the street, and that, by past experience, is an uh-oh. Have the regulators, perchance, knocked his door yet? No, he thunders, "They have tough job at hand, but are into a zero-sum game." International markets have surged up, he rages, and nobody's asking them prickly questions, so why on earth can't the Sensex rally in peace?

Going solely by the modest p-e story, it's easy to sympathise with that sentiment. There's nothing illusory about India Inc's earnings, after all. Many investors are due for fatter dividend cheques in the mail than in recent memory. Stock to stock, India's best performers still don't look overvalued. Moreover, as S. Naganath, CIO, DSP Merrill Lynch Fund Managers, sums up, "Domestic consumption has picked up due to cheaper retail finance," he says, "and the last few years' cost cutting and restructuring is yielding dividends now."

Few on Dalal Street speak of the possibility of a slideback to the 3,000 levels, and expect an ascent-albeit a longish one-past the 5,000 mark. DSP Merrill Lynch Fund Managers is projecting a Sensex 5,000 by March 2004, while HDFC Bank takes its optimism farther-to 6,000 by May 2005.

That last figure, though, is probably based on an elaborate set of macroeconomic and other assumptions, the validity of which is yet to be tested. Call it the age of discontinuity, paradox, unreason or whatever, predictions are often mere hopes trying to sound confident. Also, as with any rally, there are the attendant risks of systemic shocks. A dollar crash, for instance, could throw global markets into turmoil.

Still, the rally is real. The 'DEMAT' enthusiasm at the retail level is another good sign. The number of trades, regarded as a proxy for retail participation, has been shooting up, of late. "We see more retail investors investing this time," observes Deena Mehta, Managing Director, ACM Investment Intermediates, "and they are very well informed about the stocks they are investing in." Indeed, being well informed, in general, makes all the difference.