FIIs likely to book profit on stretched valuations

Fundamentals don’t justify such high valuations, feel analysts.

After pushing up the Bombay Stock Exchange Sensitive Index, or Sensex, from 8,100 to 14,000 since March 9, foreign institutional investors (FIIs) could be looking to book some profits in the coming days. The reason: valuations look stretched and may have gone ahead of fundamentals.

Indeed, FIIs sold around Rs 695 crore of stocks on Friday.Warning signals come from two reports published last week, after indices hit the upper circuit trading barrier on Monday. Morgan Stanley’s report says valuations have turned unattractive.

“The market is trading at a 55 per cent premium to emerging markets compared with its long-term average of 8 per cent, its recent low of 23 per cent, and its January 2008 high of 205 per cent. Relative valuations are looking rich,” wrote analysts Ridham Desai and Sheela Rathi.

Another report by Nomura has similar views.

Since March 9, FIIs have pumped in Rs 24,779 crore (till last Thursday) in just 72 days, helping the Sensex to rise by 70.2 per cent. With returns of 43.95 per cent since the year began, the Indian market has outperformed all other markets in the region, except that of Taiwan, which has returned 46.74 per cent. In comparison, Shanghai has shown returns of 42.66 per cent this year, followed by Korea and Hong Kong, with 24.84 per cent and 18.59 per cent, respectively.

Saurabh Mukherjee, head (equities), Noble, a broking firm, said, “Given the current reality, in terms of earnings and liquidity situation, the market seems to have run ahead of itself. The Sensex is currently trading at 15 times price earnings (PE), which has almost doubled since March 9."

According to him, despite the new government and perceived push for reforms, the fact is that corporate earnings are hardly growing. Banks are still not lending and there are no major signs of revival in the corporate bonds and the ECB market. “This exuberance is hype around elections. If the government does not deliver in the first 100 days, markets will become subdued,” he added.

Among sectors, experts say valuations in power, realty and infrastructure look quite expensive. BSE’s realty index has climbed up 154 per cent and the capital goods index has moved up by 104 per cent since March. Even the power index has surged 69 per cent.

The reality is that nothing much has changed for these sectors to justify this sudden spike. It’s simply sentiments and expectations that there could be more spending on power and infrastructure.

“We believe the outcome of these elections will remove the discount related to political uncertainty over the next five years. We now feel that valuations will have to be scrutinised more carefully,” said the Nomura report.