MUMBAI: Stocks on Indian bourses may be commanding huge PE (price-to-earnings) multiples, but for brokers and investors they translate into an ‘extra price’ they pay for higher returns on investments.
A dipstick study, conducted to see how well-priced desi blue chips are vis-a-vis their peers in developed and emerging markets, reveal that Indian shares are far more expensive (in terms of PE multiples) than global majors with better revenues and adjusted profits.
To make a point, L&T with a trailing PE of 56 times is far more ‘expensive’ than engineering behemoth GE (18) or a Mistubishi (13). Likewise, ICICI commanding a PE of 41 times is far more expensive than Citigroup (9) and BNP Paribas (8). IT major Infosys with a trailing PE of 24 is undoubtedly valued higher than EDS (13.8) and Oracle (20). PE gives investor an idea as to what the market is willing to pay for the company’s earnings. The higher the PE the more the market is willing to pay for the company’s earnings. PE, as an indicator, helps investor in deciding whether he should invest in a particular stock or not. A scrip trading at a PE of 15-18 times is generally regarded as a ‘fairly valued’ stock across markets, provided the company has decent earning potential.
How are Indian shares priced when compared with their peers in developed and emerging markets?
“At first glance the Indian market appears expensively priced both on an absolute basis and relative to other emerging markets. Yet these static comparisons do not take into account the higher growth projected for the Indian economy. With such a fast growth market it is important to value the future growth prospects, as uncertain as they are,” said a recent India economic report by Lehman Brothers.
According to analysts, sectors like capital goods (cement included), banking and telecom are rallying on the long-term domestic-based consumption story. If the capital goods sector is considered, almost all companies are doing exceptionally well in terms of corporate earnings and maintaining heavy order books. In the case of banking sector, increase in retail loans and higher credit off-take would help banks register growth in the years to come.
As far as telecom sector goes, India’s low mobile penetration offers huge scope for growth, experts say. IT is one sector that is not doing well for investors. A section of the market believes, the ‘dream 30% margins’ (usually associated with IT companies) cannot be maintained for a longer timeframe . However, there are optimists who believe IT stocks would continue to be upbeat on the bourses once sanity reaches world currency markets.
“Indian frontliners may appear a bit expensive , but where else in the world would you get companies with a 30% growth rate and an equally stupendous return on equity ,” asks Sage Capital’s Manish Kanchan. To some extent, professionally-run Indian companies have better business modules than the best known global conglomerates. They are well-positioned for sustained growth. All the more certain is the fact that companies in the US and Europe are commanding PEs because they are operating in an economy that is facing a downtrend, Mr Kanchan added.
Though valuations are steep, there are investors who are willing to pay more for slice of Indian equity. This, according to experts, mean investors have belief that the country has long-term growth prospects over and above its current position . “Although current static multiples look high, if growth is achieved then stocks are attractively priced even on a risk-adjusted basis. We expect Indian equities to outperform developed and emerging market indices over a five-year horizon,” states the Lehman Brothers report.
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