Is Indian Stock Market Cheap on the basis of Historic Valuations?

Is Indian Stock Market Cheap on the basis of Historic Valuations? Not much cheap, neither in bubble.

 

Market cap to GDP ratio:

This ratio compares the total market capitalization of India’s stock markets (market value of all listed companies) and the GDP of the country (the rupee value of all the goods and services produced in India).

Below is the market cap to GDP ratios of different countries,

India	70	FY 11-12
UK	125
USA	100
Brazil	48
Japan	58
Russia	41
China	36

At its peak in 2008, the market cap to GDP ratio of India was 103% i.e. the market cap of the country’s all listed companies was 3% more than the GDP i.e. total rupee value of all the products and services produced by the country.

Importantly, the 13 year average market cap to GDP ratio of India is 62%.

Thus, the market cap to GDP ratio is 33% lower than what it was in 2008 market rally highs.

However, this means that market is slightly overvalued if judged by its average market cap to GDP mode; but the market can be said to have pretty good far away from the bubble mode which is 100% or more ratio or market cap to gdp which reached in 2008 bull market highs. Also, one can infer that the market are less overvalued and may have limited downside even if they may be a little bit above the average benchmark.

The key data point here to see, is that the other emerging markets’ such as China, Brazil, and Russia are trading at far far cheaper market cap to GDP ratios than Indian market which are about 36, 48 and 41.

Thus, one analysis can also lead us to state that Indian markets can depreciate about 11% to reach its average market cap to GDP level. Or depreciate even 30% to reach to about 41 which is around the market cap to gdp ratios other BRIC countries trading at right now, as seen in the table of ratios.

So, we can conclude that Indian markets are trading pricier on the basis of market cap to gdp ratios when compared to other BRIC countries, and about fairly priced when compared with its 13 year average level, and finally very far off from being into a bubble zone comparing with the level of the ratios of 2008 peak. The feared further deceleration in the GDP growth rate of India can bring a drag on this ratio to contract.

PE Price to Earnings ratio:

This ratio is the most widely followed, and believed ratio in investing world.

To gauge if market is expensive, cheap or just fairly trading, investors try to forecast the earnings of SENSEX/NIFTY i.e. the companies comprising of the index. 

PE ratios is simple the price of the stock (here, the sensex/nifty level) divided by its EPS or earnings per share (here the sum total of EPS estimations of all sensex30/nifty50 companies). This forward projection is taken for 1 year forward i.e. if we are talking today then we are talking about PE on EPS of FY 2013-2014 i.e. FY2014.

Now, presently at 18800 the 1 year forward earnings PE ratio of SENSEX is 13 or 13 times.

The average PE ratios for SENSEX has been 14.8 times in last 10 years.

The PE ratio at 2008 euphoric rally peak was 24.6.

So, clearly comparing with the average PE we can say the markets are little bit cheap at 13 PE and far from being in the bubble zone, which is about 20 or more PE as was during 2008 bull market peak.

However, the reason for decline in PE was the decline in earnings growth. The market was expecting good corporate earnings to sustain ( above 20% post tax) in 2008, but it did not happened.  Write now the market is not expecting very good corporate earnings across the sectors, as top line have been coming down in many sectors for more than one quarter this day. While those posting growth in sales are giving declining numbers in profitability.

This lower expectation can be indeed good for markets, so that if earnings start improving markets will take it as positive surprise and rise. The infra, reality, telecom, power, capital goods sector are looking to continue to languish on this front at least for a year or two while big hope and confidence is on banking, finance, fmcg, consumer durables, auto, pharma, cement sectors which will lead the earnings higher and thus markets can move higher to adjust with this new earnings. The bubble phase will be lead by the new era in life of power, reality and telecom sectors.