Modi at Helm, Val­u­a­tions may Now Get the Fizz Back

Bench­mark in­dices trad­ing at 15 times their for­ward P/E, the fastest ex­pan­sion in EM bas­ket

The Economic Times - - Markets + Finance - BISWA­JIT BARUAH

In­dian stocks may start com­mand­ing pre­mium val­u­a­tions again com­pared with its emerg­ing mar­ket peers as the new govern­ment has re­vived ex­pec­ta­tions of a re­bound in eco­nomic growth. Last year, this pre­mium had shrunk as in­vestors were shun­ning a larger sec­tion of do­mes­tic stocks be­cause of slow­ing growth, el­e­vated in­fla­tion and un­cer­tainty about the coun­try’s prospects.

In the last one year, In­dia’s bench­mark in­dices have seen fastest price to earn­ings (P/E) mul­ti­ple ex­pan­sion in the emerg­ing mar­ket bas­ket. Bench­mark in­dices — Sen­sex and Nifty — are trad­ing at 15 times their for­ward price to earn­ings, in com­par­i­son to 12.38 times in April 2013. Among its emerg­ing peers, Tai­wan’s TAIEX In­dex is trad­ing around 13.49 times, against 12.92 times a year ago. In­done­sia's Jakarta Com­pos­ite In­dex is trad­ing at 13.23 times, against 13.32 times a year be­fore. “FII in­flows and news flow post elec­tions such as Cab­i­net for­ma­tion, the Union Budget, etc. could drive price to earn­ings ra­tio fur­ther,” said Rahul Singh, head of eq­uity re­search at Stan­dard Char­tered Se­cu­ri­ties. Till 2010, In­dian in­dices traded at higher val­u­a­tions. But, with con­sump­tion slow­ing, in­vestors’ faith in do­mes­tic stocks waned last year. In­dian mar­kets have ral­lied over the last eight months and have led to PE ex­pan­sion, de­spite earn­ings cuts by bro­ker­ages over the last few quar­ters. Mar­ket par­tic­i­pants were bet­ting on a favourable out­come of elec­tions. “Mar­kets are aware of weak earn­ings driv­ers in the near term, though op­ti­mistic about a fu­ture re­cov­ery in fun­da­men­tals,” said Neelka­nth Mishra, In­dia Eq­uity Strate­gist, Credit Suisse, in a note to its clients. The MSCI In­dia In­dex has ral­lied 13% over the last six months and has out­per­formed MSCI Emerg­ing Mar­ket In­dex. FIIs have in­vested nearly .` 45,000 crore into eq­uity mar­kets so far. “We be­lieve the prospects of pos­i­tive pol­icy mo­men­tum could keep val­u­a­tions ex­pen­sive while earn­ings play catch-up,” said Bhu­vnesh Singh, MD & head of In­dia re­search, Bar­clays. Cor­po­rate sec­tor earn­ings are ex­pected to grow at 16% CAGR over FY14-16. As earn­ings growth re­cov­ers to 20% over the next 3-4 years, val­u­a­tions will also tend to trade above aver­age of 15 times. “We be­lieve that pro-growth poli­cies and re­forms un­der­taken by the govern­ment are likely to give fur­ther im­pe­tus to re-rat­ing of val­u­a­tions,” said Ra­jat Ra­j­garhia, MD, in­sti­tu­tional eq­ui­ties, Motilal Oswal Se­cu­ri­ties. “The re­cent rally has taken mar­ket val­u­a­tions to a zone where they can no longer be termed cheap,” said Bharat Iyer, MD & head of In­dia re­search at JP Mor­gan.

A pos­i­tive pol­icy mo­men­tum could keep val­u­a­tions ex­pen­sive while cor­po­rate earn­ings play a catch-up game

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