India’s valuations stretched, but not a worry: Experts

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Valuations in the Indian markets are trending on the higher side which may make investors a tad nervous but most market players believe that India is relatively better placed and the long-term story continues to be favourable.

According to Bloomberg data, the Nifty’s current price/earnings (P/E) stands at 23.54, with the one-year forward P/E at 19.84. This is on the higher side, considering that the 10-year average Nifty P/E is 20.20.

The highest P/E recorded by the benchmark was 33.86 on October 18, 2021, while the lowest was 9.0 on October 27, 2008.

Motilal Oswal’s recent India Valuations Handbook stated that given the healthy macros, range-bound oil prices, a robust fiscal balance sheet, and moderating inflation, the outlook for the market looks optimistic, adding that valuations today are much more reasonable than in October 2021.

Experts attribute the present stretched valuations to India’s structural story, calling it “among the world’s best”.

“The country has good demographics, good long-term growth prospects, and corporate earnings are also improving. Further, there are no NPA worries thanks to our robust banking system. There is no other country with such a robust story for the next decade and, hence, Indian valuations are relatively high,” said S Naren, ED and CIO of ICICI Prudential AMC.

Agrees Kunj Bansal of the National Institute of Securities Markets, pointing out that an economic growth of 6% could result in a corporate earnings growth of 10% — indicating valuations may remain higher of the mean side.

At present, eight out of the top 10 Nifty stocks are overvalued, with only HDFC Bank (20.27) trading below its peer group average of 23.48 and Maruti Suzuki (35.74) marginally above its peer average of 35.62.

At the same time, Asian Paints (78.78), Bajaj Finance (41.06), and Airtel (58.35) are significantly above their peer group average of 54.41, 28.36, and 44.57, respectively. The first two remain highly valued based on their 12-month forward P/E of 63.67 and 34.13.

“Valuations are at a premium to our long-term averages. The Nifty has remained in the range of 16,700-18,700 for the last two years. This is more of a technical breakout. It may sustain and potentially reach 20,000, but the upside from here should be limited. In the last quarter, we did not see any major earnings upgrade, while 50-55% of the stocks under our coverage saw earnings downgrade. Therefore, valuations are much of a concern,” says Rahul Arora, CEO of Nirmal Bang Equities.

India’s strong economic growth indicators have led to more interest among foreign investors in betting on the country. May and June saw a total net investment of $11.72 billion by FIIs, while the net investment for the calendar stands at $11.16 billion.

“Besides the earnings growth P/E, the other P-E we need to look at is ‘Perception Earning’. Global investors are queing up to invest in India, which has led to an increase in fund flows. This will create more opportunity and liquidity, hence making the valuations stronger,” said Deven Choksey, founder and promoter of K RChoksey Group.

Despite the concerns, the silver lining is that on a global level, India is fundamentally in better shape given the long-term picture. With recession hitting markets such as Germany and Australia, and expected in the US, experts say India remains the next best option for foreign investors.

A note by JPMorgan also stated that long-term investors will do well to stay bullish on India — notwithstanding the high valuations that may restrict their short-term upside — because aggregate consumption and earnings still have the potential to increase. It added that a higher proportion of the top 500 stocks by market cap in India (41%) delivered a higher profit (CAGR terms), than those in China (34%) and US (27%), during the period.

“Oil and metal prices have been benign, and India has benefited as it is a commodity consuming nation. The revival expected in China at the beginning of the year has not really played out, which has led flows to divert to India,” said Unmesh Sharma, Head of Institutional Equities at HDFC Securities.

The brokerage estimates a 12% growth in Nifty EPS for FY25, compared to a Street average of 15-16%, and Sharma says there is no reason to believe there will be a major correction in valuations. “Given the slowdown in other nations, the 12% figure looks good. The focus will now be on FY25, and the growth is likely to be in the mid-teens. While valuations are stretched, it’s not to astronomical proportions,” he added.


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