Mumbai: With the benchmark Sensex index crossing the 32,000 mark for first time ever last week, gaining over 20% in 2017, Indian markets have become most expensive among peers. In terms of valuation, one-year forward price-to-earnings (PE) ratio of Sensex is 18.5, while it is 17.9 for Nifty, compared to 12.6 and 16.5 for MSCI Emerging Markets and MSCI World, respectively.
However, according to Bank of America Merill Lynch, the headline PE for India does not apply to all sectors, as higher valuations are primarily driven by consumer and inward-facing businesses.
Sectorally, BSE FMCG and BSE Telecom are the most expensive indices with one-year forward PEs at 33.75 and 123.65, respectively.
Among BSE 200 stocks, Indian Hotels, United Breweries, Info Edge India Ltd, GlaxoSmithKline Pharmaceuticals Ltd, DLF Ltd, Hindustan Unilever Ltd, Blue Dart Express Ltd and Siemens Ltd are among the most expensive stocks with one-year forward PE ranging between 47 and 65. However, not all of these stocks have fared well this year.
For instance, the PE of United Breweries is 65 but the stock is up only 2% in 2017. On the other hand, the DLF stock climbed 78.62% with PE at 48.23.
Analysts said the valuations of these stocks are stretched and irrational.
Jimeet Modi, chief executive officer, SAMCO Securities, said that due to inflow of strong liquidity which propelled the markets rally, there is frenzied buying in spite of these stocks being richly valued.
“Another reason which has pushed valuation is the markets expectation of 30-50% growth in these companies. However, due to factors like goods and services tax (GST) disruption etc., earnings will still be under pressure for a few quarters. Such market behaviour may be worrisome for investors in the near term," he added.
At current valuations, cheapest indices are BSE Metal with PE at 11.41 and BSE Oil and Gas with PE at 11.41.
Even though both pharmaceuticals and information technology stocks have been under severe pressure due to industry-specific reasons like compliance, visa and rising rupee valuation, PE of the two indices haven’t fallen sharply.
BSE Healthcare fell 1.86% and BSE IT slipped 0.12% in 2017, but PE of the former is at 22.02 and of the latter at 15.04.
“Indian IT companies have given up their valuation premiums as growth expectations have degrades. Other industry sectors in India such as materials, utilities and healthcare continue to trade in line with regional or emerging markets valuation," Bank of America Merill Lynch said in a 12 July report