Is the Indian equity market overvalued? These are questions on every investor's mind. The market has had a roaring year with the benchmark indices touching new highs at the beginning of the year.
The mid-year political jigsaw the market falling to a low but as the new government found its feet so did the market. Riding on strong foreign fund inflows, the market has again soared to new heights.
Despite the new highs, most players say that there is some more steam left in the rally because valuations still look attractive.
Nandan Chakraborty, head of research at Enam Securities explains, "Forward valuations are lower than when we had almost a year back.
Besides, we are far more attractively valued as compared with some other competing markets for foreign funds, one of the main drivers of the rally.
"Statistics show that valuations of stock markets are reasonable. In August 2000, the price-to-earnings ratio of the Sensex basket had touched a peak of close to 30. Since then the trend has been downwards. It touched a low of 13 just before December 2002 after which there has been a rise again.
In September 2004, the Sensex was trading at 17 times earnings and "now at current levels of the index, the Sensex is trading at 13 times estimated earnings for 2005-06," according to Ramdeo Agarwal, deputy managing director, Motilal Oswal Securities.
Even among Asian peers, Indian valuations do not look excessive. According to data sourced from Citigroup Research, markets in the Asia Pacific (ex-Japan) are trading at 12.3 times their P/E, China is trading at 11.3 times, Hong Kong 16.5 times, Indonesia 9.8 times, Korea 7.2 times, Malaysia 13.4 times, New Zealand 14.4 times, Singapore 13.5 times and Thailand 9.9 times.
In the Western markets, the S&P 500 index is trading at slightly under 20 times its price to earnings ratio.
According to Citigroup analysts, "Indian markets valuations are roughly in line with other Asian emerging markets, despite a more robust economy with a lower dependence on Chinese and US import demand."
Analysts at Prudential ICICI Portfolio Managers said for fiscal 2005, "corporate earnings are likely to be moderate." This is because inflationary pressures on input cots could put pressure in operating margins of corporates.
However an analyst said, "with inflation coming down below 7 per cent and oil prices plunging, probably this concern might not be so imperative."
DSP Merrill Lynch says that Indian earnings growth may be more vulnerable to a downtrend in the global economy, especially in global commodity prices than the economy.
