Commenting on valuations after the sharp gains in stock prices, Nilesh Shah, managing director at Kotak Mutual Fund, said valuation of India markets looks "fair" as they currently discount future earnings growth.
According to Mr Shah, profitability of listed Indian companies is currently around 4 per cent to GDP and this can go up to 6 per cent of GDP, which is the long-period average.
"Profitability to GDP ratio is at the bottom quartile now, around 4 per cent. This profitability could go up to 6 per cent of GDP," said Mr Shah.
The fund manager believes corporate profitability, which have started taking an upward trajectory from the March quarter, will accelerate further and support valuations.
Falling interest rate and cost-control measures taken by Indian corporates over last four years will also lead to higher profitability, he added.
"Our study shows 1 per cent drop in interest rates results in 7 per cent increase in profitability for corporate India (excluding banks and financials)," Mr Shah said.
The fund manager further said that higher government spending in the infrastructure sector, record FDI (foreign direct investment) inflows, normal monsoon and the liquidity provided by Reserve Bank will support the earnings growth of the corporate India.
Meanwhile, Mr Shah is positive on the cement sector as he believes that capacity addition in the sector will be limited going ahead and consolidation in the sector has resulted in cost savings for cement companies.
"Cement companies can increase their margin without increasing prices," Mr Shah added.