Journalism of Courage
Strong inflow of foreign portfolio money into the Indian markets has pushed the benchmark Sensex to trade at a premium to most markets worldwide.
At 16.3 FY14e price-to-earnings (P/E),the Sensex is trading at a premium to most other emerging markets. Japan is the only market that is ahead of Indian equities in terms of valuations,a recent study by Mumbai-based financial services firm Motilal Oswal shows.
However,the study also highlights that the return on equity (RoE) of Indian equities is at a premium to global markets and thus higher valuations may be justified.
Moreover,India is the only market among the Bric nations that has given positive year-to-date returns. The Sensex has give positive returns of 8% so far this calendar year versus -11% by Brazil,-4% by Russia and -5% by China.
Foreign institutional investors (FIIs) have invested more than $16.2 billion in Indian equities since the start of this year,official data shows.
Despite the recent surge,benchmark indices are still below their historical average valuations. At 21,000 levels,the Sensex one-year price-to-earnings (P/E) trades at a 3% discount to its to long period average (LPA) and one-year price-to-book (P/B) is at a 11% discount to LPA.
Even with the Sensex touching life-time highs,as many as 17 Sensex firms are trading at a discount to their LPAs. Some of the notable names include Dr Reddys Laboratories,which trades at a 40% discount to its 10-year average P/E,followed by Bharat Heavy Electricals Ltd (BHEL) (38%),NTPC (32%),ICICI Bank (27%),HDFC Bank (20%) and Tata Motors (22%).
ITC Ltd trades at a 45% premium to its 10-year average,followed by Hindustan Unilever and Bharti Airtel at 33% each,Bajaj Auto and Sun Pharmaceuticals Industries both at 32% while
Tata Power Ltd at 27%.
Market capitalisation to gross domestic product (GDP) at 59% is far below the averages and closer to the lows of last decade,the study shows.
The performance in the current rally vis-a-vis the previous rally also shows a huge divergence in sector performance,the study said.
Technology stocks have led the current rally with y-t-d returns of 49%,followed by telecom (35%),healthcare (20%) and consumer (15%). In the previous rally (November 2010),consumer staples and healthcare stocks led the rally with 83% and 45% returns.
Automobiles,healthcare and technology sectors are at attractive valuations relative to historic averages…Cyclicals are at discount. Global cyclicals are a huge discount to markets, stated the study.
Public sector banks are at 46% discount to historical P/B and 74% discount to market P/B.
