Mumbai: Though most equity markets have fallen sharply from their peaks, India continues to be one of the most expensive among peers. After losing nearly 5% from their record highs touched in January, Sensex currently trades at 18.12 times, based on one-year forward earnings. In contrast, one-year forward price to earnings (PE) of MSCI Emerging Markets is 12.25 and that of MSCI World is 15.8.
Sectorally, BSE FMCG, BSE Consumer Discretionary Goods and Services, BSE Capital Goods and BSE Healthcare are the most expensive indices with one-year forward PEs at 30.9, 25.5, 24.9 and 22.8, respectively.
Among BSE 200 stocks, DLF Ltd, Avenue Supermarts Ltd, United Breweries Ltd, Bank of India, Indian Hotels Co. Ltd, Info Edge India Ltd, Dish TV India Ltd, Biocon Ltd and Bharti Airtel Ltd are among the most expensive stocks with one-year forward PE ranging between 50 and 76.06 times.
At current valuations, the cheapest indices are BSE Oil and Gas, BSE Energy and BSE Metal with one-year forward PE at 10.8, 11.7 and 11.9, respectively. Stocks like IRB Infrastructure Developers Ltd, IDFC Ltd, Oil & Natural Gas Corp. Ltd, Vedanta Ltd, Reliance Power Ltd, Oil India Ltd, Hindustan Petroleum Corp Ltd and Tata Motors are cheaper in valuations with one-year forward PE at around 8-9 times.
According to JM Financial Institutional Securities Ltd, the Reserve Bank of India’s (RBI) latest monetary policy seems to suggest that risks on inflation are on the upside indicating no respite from yields and at least one indicator indicates that market valuations indeed look stretched and that it would be difficult to make absolute returns in the market this year.
“One of the numbers we have been following to track the markets have been the yield gap and that is now at its highest since August 2007 highlighting that either inflation has to give in or growth has to surprise on the upside for the valuations to be sustained at these levels. Based on the past few quarters’ results and view taken from our analysts, the risks of an upgrade to earnings growth appear low,” it said in a report on 7 February.
In its monetary policy review on Wednesday, the RBI warned that inflation risks were skewing upwards and also raised its March quarter Consumer Price Index (CPI) inflation forecast to 5.1% and projected an inflation range of 5.1-5.6% in the first half of the next fiscal year.
Concurring similar views, Kotak Institutional Equities said that valuations of the Indian market will be still rich. “Even assuming no risks to the quantum of earnings growth over FY2019-20, the quality of earnings growth is quite poor, with a large portion of incremental profits of the Nifty-50 Index and coming from sectors such as PSU banks, metals & mining, oil & gas and utilities, which should logically trade at lower multiples (10-12 times given the low return on equities of the businesses and/or high profitability in the case of commodities),” it said in a note on 6 February.