Valuations ease after equities time-correct

INDIAN EQUITIES HAVE seen a significant time correction in the past year and a half. The benchmark BSE Sensex was at 59,106 as of Monday's close, which is below the levels the gauge was trading at in October 2021.

- ASHLEY COUTINHO

Has the market, then, become cheaper? Yes, and no.

In FY22, India's market capitalisation-to-GDP ratio was 112%, which decreased to 95% in FY23.

The valuation differential between India and China has reverted to its traditional mean after the huge 65% outperformance of MSCI China over MSCI India from the end of October 2022 to late January following the China reopening, according to Jefferies.

Nifty's PE premium to the China H-share index has declined from 208% at the end of October to 115%, in line with the 10-year average of 118%.

Yet, on a relative basis, India is still trading at a premium to most emerging market peers (see table).

"The challenge, as always in India, remains relatively-high valuations. The Nifty index is on 17.4x earnings on a 12-month forward basis, compared with a long-term average of 16.2x since 2008. Nifty earnings are forecast by consensus to grow by 9.7% in FY23 and 20.7% in FY24," said Christopher Wood, the global head of equity strategy at Jefferies, in a recent note.

"Valuations are primarily a function of potential earnings growth. If the earnings growth slows, valuations are bound to get compressed.

That's what we are seeing now," said UR Bhat, director, Alphaniti Fintech.

"We are still not cheap despite the time correction. While valuations look better now than when we were at 18,400 levels, for the Nifty, we cannot really say we are in an attractive zone yet as the earnings growth numbers have been facing downward pressure." Bhat believes that valuations will look attractive if companies regain pricing power and there's a surge in demand. That is still some time away.