With benchmark equity indices Sensex and Nifty hitting new highs, brokerages are mixed over the prevailing market valuations and optimistic consensus earnings projections for FY24 and FY25. Foreign brokerage CLSA said there are reasons now to be more relaxed buying India, but also reasons not to be.
It said it remains cautious for now, given exceedingly rich valuations, margin erosion depleting India’s relative profitability and consensus earnings growth expectations remaining too optimistic against the delivered track record. It added that the Reserve Bank of India (RBI) is likely lagging emerging market central banks in the timing and scale of policy easing, and its econometric model is signalling the domestic market is 14 per cent overbought.
On Wednesday, Sensex hit a fresh record high of 63,948.84 and Nifty hits its all-time high of 18,982.05, thanks to Rs 30,514 crore worth foreign inflows this month, in addition to Rs 43,838 crore inflows in the previous month.
CLSA said MSCI India is currently trading 14 per cent higher than the level which prevailing macroeconomic conditions warrant given the two-decade relationship between the index (in US dollar terms) and four explanatory variables that in combination have explained 80 per cent of the index’s monthly movements over the past couple of decades.
To recall, the domestic market underperformed APAC regional equities by 25 per cent from end-October 2022 to end-March 2023, before clawing half of the lost ground in June quarter.
"Indian equities are trading on an 80 per cent premium sector-adjusted 12-month forward consensus earnings multiple and 2.6x cyclically adjusted earnings relative to EM. Ongoing margin depletion has driven India’s relative ROE to just 1.1 times EM levels while India trades on a 2.2 times book premium to EM. Since 1996, aggregate consensus sell-side earnings growth projections for India have disappointed 82 per cent of the time yet consensus is for particularly aggressive EPS growth in FY23 through 2025," CLSA said.
Citi, in its mid-year outlook note, said it sees India, along with Japan and Southeast Asia receiving increasing attention from global investors. It said Asia is set to outgrow and outperform relative to other regions over the years to come. Demographics, diversification of supply chains, a weaker US dollar and a more accommodative Federal Reserve should provide the fuel, the foreign brokerage said.
The post-Covid recovery in India and Southeast Asia has been boosted by a substantial rise in investment as global companies seek to diversify their supply chains. The economic recovery is strongest in Thailand, India, Indonesia, and the Philippines, all of which saw stronger earnings growth, Citi said.
"Equity prices have rallied in tandem, but continue to lag earnings, so valuations remain at the lower end of their historical multi-year range. We expect improved equity performance in the second half of this year, supported by potential weakness in the US dollar, rising demand in the region and increasing direct foreign investment due to US-China strategic competition," it said.
Siddhartha Khemka, Head of Retail Research at MOFSL said Nifty finally managed to cross its previous highs after making several attempts in the past few days, "Strong institutional flows, healthy macros and robust earnings growth drove domestic market towards its new highs," he said.
Khemka funds the current valuations reasonable at 19 times one-year forward PE and cited that valuations at the previous peak touched a high of 24 times. With monsoon kicking in and RBI taken a rate pause, the strong momentum in earnings is likely to continue. "Thus at current valuations, he market is expected to continue its up move and remain buoyant,” he said.
Emkay Wealth Management said Indian markets continue to be fairly valued zone relative to global valuations and the FII are buying into Indian markets as it stands out strongly among growing economies. "Domestic investors too continue to pour money into Indian equities. Strong India growth can support higher valuations in the medium term. The corporate commentary/ tax collections and consumer data indicate good growth in FY24," it said.
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