Indian stocks among the most expensive

HUL, UltraTech Cement, Asian Paints, L&T and HDFC Bank top global valuation charts

India is not the world’s fastest-growing economy but its top firms are the most expensive globally, going by their stock prices. And, that has made India’s stock market the most expensive after Japan’s Nikkei. From Hindustan Unilever in the consumer goods space to UltraTech Cement and Asian Paints and HDFC Bank, most of India’s top firms’ stocks, by key valuation metrics, are now the most expensive in their respective sectors globally.

Consumer staple maker Hindustan Unilever, for example, is currently trading at 53 times its net profit in four trailing quarters and 57 times its net worth (shareholders’ equity). By comparison, Procter & Gamble, the world’s top consumer goods makers, is available at 21.3 times its trailing 12-month earnings and 3.7 times its net worth. An investment in P&G yields twice the dividend income a similar investment in HUL does.

The most optimistic valuation, however, is of Asian Paints. The Mumbai-based paint maker’s stock, at nearly 68 times its net profits in four trailing quarters and 19 times its equity, is the most expensive on our list. At this ratio, it is more than four times as valuable as global peer and the world’s top paint maker, PPG Industries. The US-based paint maker is currently valued at 15.2 times trailing earning and 5.1 times net worth. Investment in PPG also delivers twice the dividend a similar investment in Asian Paints does.

Analysts attribute this to a mix of faster earning growth and market exuberance about the India growth story. “There is a case for premium valuations for industry leaders in India. But in some cases, valuations have gone over the top. This is due to foreign investors flocking to India in search of higher returns,” says Devang Mehta, senior vice-president & head (equity sales) at Anand Rathi Financial Services.

In general, the Indian stock market is also currently among the most expensive globally.

Even the slow-growing automobile sector has become investors’ favourite on Dalal Street, making India’s top car maker Maruti Suzuki the most coveted auto stock globally. Suzuki’s India arm is three times more valuable by price-to-earnings multiples than the world’s top car maker, Japan’s Toyota Motor. This is despite the fact that an investment in Toyoto Motor yields eight times more dividend income than a similar one in Maruti Suzuki does.

But these high valuations worry some analysts. “Valuations in India are getting disconnected with fundamentals, as stock prices have become a function of liquidity flow and sentiment,” says Dhananjay Sinha, head of corporate equity, Emkay Global.

Others see a scarcity premium in the current valuation, as benign liquidity globally is forcing investors to maintain a minimum exposure in India’s top stocks, regardless of underlying fundamentals. “The exchange-traded funds are one of the top sources of FII inflows in India. These operate on the basis of sectoral weights and their choices in India are limited to key stocks. This has led to over-investment in stocks like HUL, Asian Paints and L&T, which are doing better than peers,” adds Sinha.

A similar valuation gap is visible in sectors like financial services (HDFC), banking (HDFC Bank), construction & infrastructure (Larsen & Toubro) and real estate (DLF). The market expectation of a rapid recovery in India’s economic growth has led investors to bid up share prices in all cyclical sectors. The danger, however, is that the stock prices will come down sharply at the whiff of bad news, if the growth does not materialise as expected. And, if that does not happen, India Inc will continue to be the blue-eyed boy of global investors.