What will drive the Nifty beyond 8,000 level

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http://www.livemint.com/Money/RbyA9LBE6ZFY4jzFthulCI/Drivers-of-the-Nifty-beyond-8000.html?utm_source=copy

With the CNX Nifty index on the National Stock Exchange breaching 8,000 points, is there scope for a further move up? Are we at the threshold of a new bull market? The answer is yes, if the ratio of corporate profits to gross domestic product (GDP) were to revert to the mean. The ratio of profit after tax of firms on the S&P BSE 500 index to nominal GDP hit a trough in fiscal year 2013-14 at 2.8%. India’s GDP growth has been anaemic for the last two years, but corporate profitability, which used to grow faster than nominal GDP before 2010, has done even worse. The ratio has been hovering below the last decade’s mean of around 3.3% for the past three years now. So the big question is: will the ratio of corporate profitability to GDP revert back to the mean?

Earnings growth has bottomed out with net profit of S&P BSE 500 companies (excluding oil and gas, information technology and banks) growing at 29.8% in the June quarter and the economy has turned a corner with GDP growth of 5.7%, the highest in over two years. Bank of America Merrill Lynch in a note dated 1 September says that if the profit to GDP ratio reverts back to the mean, it could mean a doubling of corporate profits in the next four years. Economic recovery is expected to gather steam on the back of unclogging existing investment projects. Around $134 billion worth of projects are stalled, and more than half of them stuck due to land acquisition issues or government clearances, according to the Centre for Monitoring Indian Economy Pvt. Ltd’s (CMIE’s) Economic Outlook. This makes up around 7% of GDP. If the government is able to revive around $60 billion worth of stalled projects in a base case scenario, it will lead to sustainable improvement in GDP growth and corporate earnings, said Societe Generale in a note dated 13 August. Of course, for the earnings growth to be sustainable, much depends on government efforts to usher in structural reforms.