The market valuation of Indian stocks is currently the second highest among emerging markets with the Sensex trading at a price-to-earnings multiple of 23.27 times the trailing twelve months earnings. Jakarta Composite of Indonesia trades at a P/E of 25.17.
The BSE Sensex is the costliest among emerging markets in relation to a forward P/E of 19.40 times on the basis of the estimated earnings for 2006-2007. Jakarta Composite stood second with a forward P/E of 18.55 times.
With the Sensex level of 14,000-plus, the Sensex P/E of 23.27 is ranked at number four after Nasdaq (P/E of 39.95), Nikkei-225 (P/E of 37.05) and Shanghai A shares (P/E of 34.59). Thailand SET is the cheapest among the emerging and other major international markets with a P/E of 9.12 times.
Hang Seng of Hong Kong is currently trading at 14.92, while its forward P/E for FY07 is estimated higher at 15.96. Jakarta Composite of Indonesia, which trades at 25.17 times now, has a lower forward P/E at 18.55 times. KOSPI of South Korea trades at a P/E of 11.99, with its forward P/E trading at 14.13.
According to analysts, the Indian stocks are getting better valuation than those of the Asia-Pacific market largely on account of their good fundamentals and future growth in earnings. According a UBS study, the earnings of Sensex stocks are likely to increase by 33 per cent in FY07 and by around 19 per cent in FY08.
The study said the domestic market is fully valued now with little possibility of further re-rating over the next one year. It added that possibilities of a significant devaluation are limited because valuations are not excessively expensive as was the case in 1994-95 and 2000-01.
There is still significant money waiting on the sidelines to be invested in India. The domestic institutions are holding $3.5-4 billion in cash and many large FIIs are still lightweight in India, the study said.
Currently, the Sensex is trading at 18.9 at one-year forward P/E multiple, a premium to the long-term average PE of 14.6 times.
Though this is significantly lower than the previous peaks, the present P/E multiple would rise to over 20, excluding the global cyclicals such as metals, energy and petrochemicals from the market.
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