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