The Economic Times - - Companies: Pursuit Of Profit -

ET In­tel­li­gence Group: Dalal Street is now busy draw­ing par­al­lels be­tween the Nifty’s 2007-08 peak and its re­cent climbs past the 10,000 bar­rier. The all-time record highs have meant 23% YTD gains — and 74% in the past four years. The sharp rally in the broad­est gauge for In­dian eq­ui­ties has, un­der­stand­ably, put the mi­cro­scope on val­u­a­tions and the like­li­hood of a cor­rec­tion. Ab­so­lute lev­els not­with­stand­ing, a raft of val­u­a­tion pa­ram­e­ters and factors seem to in­di­cate that eq­ui­ties are far from peak­ing.


It is true that at 23.3, the Nifty’s P/E mul­ti­ple might be close to that in Jan­uary 2008, when the pre­vi­ous bear­mar­ket­setin.Bu­ton­mostother val­u­a­tion pa­ram­e­ters, eq­ui­ties ap­pear way cheaper.

For in­stance, on the price-to-book multiples, the Nifty is at 3.6 times cur­rently, against the peak of 6.6 times in early 2008. In­dia Inc’s mar­ket cap­i­tal­i­sa­tion-to-GDP is at 90% cur­rently in com­par­i­son to 150% dur­ing the Jan­uary 2008 peak. With earn­ings growth set to re­vive soon, the price-to-book and m-cap-to-GDP are bet­ter val­u­a­tion yard­sticks than sim­ply the P/E.


The earn­ings-to-GDP ra­tio is the low­est in the last 10 years — at 3% now, com­pared with 7.1% in FY08. This shows that cor­po­rate earn­ings are at cycli­cally low lev­els and an­a­lysts ex­pect them to rise from the se­cond half of the year. Data since 2000 show a de­gree of cor­re­la­tion be­tween rates and eq­uity in­dices — al­beit with some lag ef­fect. Di­rec­tional changes in the rate cy­cle clearly mark the be­gin­ning of ei­ther eco­nomic con­trac-

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