India is the second most expensive stock market worldwide after Japan, as foreign institutional investors (FIIs) pumped in over $20 billion into the nation’s equities, the second highest inflow since 1993. The Sensex is trading at a price to earnings (P/E) ratio of 15.77 times its 2012 estimated earnings per share, making it among the most valued equity benchmarks in emerging markets.
India is the costliest market also among BRICS (Brazil, Russia, India, China and South Africa) nations and is trading at a substantial premium to China. Even on the basis of 2013-14 estimated earnings, which capture the growth estimates of companies compromising the respective indices, the Sensex remains the second most costly market after Japan
Unabated FII inflows have aided the rise in India’s stock valuations. The Sensex has gained 26 per cent in calendar year 2012 from 15,454.92 to 19,486.8, while its gain in the current financial year is 11.97 per cent. Foreign investment banks such as Goldman Sachs, Morgan Stanley and HSBC are betting on further upsides in the nation’s benchmark indices, as FII inflows might continue amid the government’s attempts to revive investor sentiment with a slew of pro-business measures, including foreign direct investment in multi-brand retail and loose monetary policies adopted by global central banks. Morgan Stanley expects the Sensex to rise nearly 26 per cent to 23,079 by December 2013, Goldman sees the Nifty scaling to 6,600 by December 2013 and HSBC’s head of technical analysis, Murray Gunn, in a recent interview with Business Standard, said the Sensex could touch 25,000 by next year. The Sensex closed at 19,486.80 and the Nifty at 5,930.90 on Thursday.
Indian stocks have always traded at a premium to most emerging markets since the last bull run, thanks to its superior economic and earnings growth. But with earnings outlook turning hazy, many analysts do not see much room for further expansion in valuations.
“India’s current valuations reflect an average earnings growth of 8-10 per cent over the next couple of years. But, here on, there is very little space for stocks to re-rate," said Tirthankar Patnaik, director and strategist, Religare Capital Markets.
Investors and analysts believe the government’s recent moves may not be enough to revive the sagging economy. On most economic parameters, the country is on a weak wicket.
Analysts said Indian markets may look expensive if Sensex valuations are considered but that is not the case with stocks beyond the top 200. Majority of the foreign institutional flows into the nation’s stock market has been into the large-caps and some well-known mid-caps.
“There is still lot of value in many stocks outside the top 200 stocks that are yet to be tapped. But this will not happen unless retail investors return to the market," said Patnaik.