India's auto, steel, cement, drug and banking sectors offer investors good pickings in a beaten down market as underlying fundamentals are sound and the economy looks set to gather steam, fund managers said on Tuesday.

Recent strong corporate earnings growth and signs the world's 12th largest economy was improving combined with the government's renewed commitment to privatisation to provide a recipe for a strong rebound, they said.

"We feel the market may be waiting for the geopolitical situation to settle down before rising," said Ved Prakash Chaturvedi, CEO of Tata TD Waterhouse Asset Management.

Fund managers said valuations at current levels were attractive, after the monthly average price-earnings ratio of the Bombay Stock Exchange's Sensex dropped to 14.27 in December from 16.35 at the start of 2002.

Although the index, the country's most closely-tracked equity marker, ended 2002 3.5 per cent higher and was one of only five gainers in Asia, chartists said the market had not broken decisively out of a bear phase that started in 2000.

"It is a pretty good time to look at investing, given that we are already quite deep into a three-year bear market," said Ashim Syal, chief investment officer at ING Barings in Mumbai.

The benchmark had dropped 2.8 per cent this year to Monday's close. On Tuesday, it was up 0.28 per cent in afternoon trade.

Economic turnaround

A turnaround in the economy, Asia's third largest, also holds out promise for future earnings. India's economy grew at 5.6 per cent in the year ending March 2002, up from 4.4 per cent a year earlier -- a scorching pace in a global slowdown.

Corporate earnings growth in the last quarter has also been healthy, with 22 companies in the Sensex reporting net profit increases.

One company reported a turnaround, five posted drops in profits, while two firms are yet to report results.

"Broadly, results have been good across the board and suggest the economy has turned around," said Gul Teckchandani, chief investment officer at Sun F&C.

Leading firms in the auto sector posted year-on-year earnings growth ranging from 14 to 79 per cent for the last quarter.

For the banking sector, the comparative increases ranged from 20 to 83 per cent and for the cement sector, 12 to 48 per cent.

"Some sectors have gained from specific factors. For example, petroleum and steel have benefited from a global uptrend in prices, but overall there is a positive flavour across sectors," said Chaturvedi.

Outlook good

Interest rates are now at a three-decade low and look like they will stay soft in the near term, offering companies scope to rein in borrowing costs while tempting more people to borrow, leading to increased demand for cars, two-wheelers and houses.

Investor confidence in the government's commitment to economic reforms also received a boost last month when it finally cleared big-ticket privatisations of two state-run oil refiners, which had been held up for almost a year.

Some of that confidence is reflected in foreign fund inflows, which surged in January to their highest monthly level in almost a year.

Foreign funds invested a net $221.4 million in equities in January, the highest monthly total since last February. They have invested a total of $15.5 billion in Indian shares and debt.

The strength of India's external sector, with foreign exchange reserves at record highs of above $73 billion prompted Moody's Investors Service on Monday to upgrade the country's foreign currency debt rating by one notch.

Although the revised rating still denotes junk bond status, the upgrade should further boost foreign investor interest in India, analysts and traders said.

But they also pointed to key risks.

"Basically there are still three event risks in the form of Iraq, the budget and privatisation," Syal said.

"The big question is whether investor expectations from the budget and privatisation process will be met."