The market meltdown caused by the West Asia crisis has eased India’s valuation from peak levels, yet the market remains the second most expensive among Asian peers.
The good news is that the valuation has been coming down. The trailing 12-month price-to-earnings (PE) India’s 50-stock index is almost 21.77x, which is lower than the 5-year and 10-year averages of 23.7x and 23.3x, as per Bloomberg data. However, only Taiwan has a higher valuation in Asia at 24.6 x. India’s P/E continues to be higher than Indonesia, South Korea, and China (18.3x-19.7x).
Even the forward P/E is 18.19x is lower than the 5-year and 10-year averages of 19.8x and 18.9x. And only Japan is higher at 22.30x.
Decoding the Market Melt
The Nifty 50 has fallen over 8% since the war broke out in late February, sharper than the 1-6% fall recorded in peer nations such as Malaysia, China, Singapore, Hong Kong, and Taiwan. However, there are other underperformers who were axed even deeper than India. Headline indices in Japan, South Korea and Indonesia nosedived around 9-13% during the same period.
India has been “pricey”, as market experts called it, at the global front for a very long time. But, from a standalone point, many still call it ‘reasonable’ considering the country’s underlying growth.
Most experts like Deepak Shenoy CEO, Capital Mind Mutual Fund, however, believe that the India’s valuation has always been higher in bull as well as bear market scenarios.
“The Indian market’s premiums are at the lower end of the range it has been historically,” said Gaurav Misra, co-head of equity at Mirae Asset Global Investments, said. So, it is justified given the quality of the corporate balance sheet and return on equity of Indian companies. However, he worries that if the war prolongs, corporate earnings could get pulled down and valuations will have to be looked at from a different context.
UR Bhat, co-founder and director at Alphaniti Fintech, believes that valuations have to be seen in the light of general interest rates in a particular country and the earnings growth represented by the headline index. “We cannot really compare the valuations of India with Korea, China, or the US unless we look at these factors.” If earnings growth catches up or becomes robust, valuation will be better, Bhat said.
Outlook
With the ongoing correction in the market, one of the important questions is whether the market has hit the bottom. The answer to that, according to many experts, is no. A few expect the Nifty 50 to fall 5% more if the geopolitical tension does not get resolved in the near term. Going forward, many market participants believe that the trend of India being expensive will continue as has been the case always.
