The Hindu Business Line : How expensive is the Indian market?

BL Research Bureau Are Indian stocks too expensive after the breathless rally of the past few months? If you take the Sensex as a proxy for the Indian markets, yes. Its price earnings multiple, at 26.9 based on past year’s earnings, definitely looks stiff both in relation to long-term trends and in comparison to its peers in other emerging markets. The Sensex’s PE multiple now is several levels above its five-year average of 18. Over the past five years, the bellwether’s PE multiple has swung between 10 and 27 times its historic earnings. It has averaged 15 for a 10-year period. The Sensex also appears dear compared to many other emerging market indices that figure on the radar screens of institutional investors.

The Sensex is much more expensive than Brazil’s Bovespa, which trades at about 15 times, Taiwan’s Taiex (21 times), Thailand’s SET (21 times) or Korea’s KOSPI (16 times). The only exception is the Shanghai Composite index of China, which trades at a whopping 68 times.

Higher growth rates

Indian companies will have to deliver much higher growth rates in earnings than most other emerging market peers to justify the current Sensex valuation. The PE of 27 assumes that earnings of the constituent companies would sustain a 25-30 per cent annualised growth at least over the next five years. Is it time to raise the flag of caution? Especially after the slowdown in earnings growth reported by India Inc in the September quarter.

However, investors can probably take heart from the fact that not all of the Indian stock market is as expensive as the Sensex.

With the recent market rally bypassing large swathes of mid- and small-cap stocks, the PE multiples of these stocks are far below those of the Sensex constituents. The PE multiple of the BSE Midcap index is, for instance, at just 22. What is more, a good 60 per cent of the stocks listed on the NSE are still trading at a PE multiple of less than 20, based on their past year’s earnings.