M-cap to GDP ratio at 3-yr high

Upside on macroeconomic factors will be keenly watched, say experts

The value of Indian listed companies as a percentage of the country’s economic output is at its highest in a little over three years, an indication that market valuations are at least fairly valued.

Growth in economic output and better earnings from companies might determine if there is more upside left, say experts.  

The analysis looked at the trailing 12-month’s gross domestic product (GDP), a measure of the total value of goods and services produced by the country. Market capitalisation figures were based on the average for the quarter.

The average market capitalisation of Indian companies is currently Rs 92.34 lakh crore or 85 per cent of the last four quarters’ GDP figure of Rs 107.59 lakh crore.

Anand Tandon, managing director at Gryffon Investment Advisors, said the figure places India in the middle ground on valuations. “If the market cap-to-GDP figure was to be at 120 per cent, then the valuations would seem somewhat overdone. Similarly, a figure of 30-50 per cent might indicate the markets are oversold. At current levels, the markets seem more than fairly valued but there is no scope for disappointment on valuations or earnings,” he said.

“At this point, we are reasonably valued, not overvalued, considering that the macros are improving. The GDP has been at the bottom end, and there is the potential of earnings upside,” said Gopal Agrawal, chief investment officer, Mirae Asset Global Investments (India).

The figure is still off its all-time high of 143.25 per cent, in December 2007, when the earlier bull market was nearing its end. That market, incidentally, began when the market cap-to-GDP figure was near all-time highs for the time, though less than 60 per cent.  It subsequently continued to go up till the end of 2007 as the markets continued to run even as growth took off.

Morgan Stanley India in its India Equity Strategy report said the situation was different from the 2003-2004 period. “Even after the sharp rally a year after the bull market started, broad market valuations were lower in 2004 than they are today. We note that by early 2004, market/GDP was almost at a record high, whereas today we are well off the historical peak,” said the report dated September 10 and authored by Ridham Desai, Sheela Rathi and Utkarsh Khandelwal.

GDP grew at 5.7 per cent in the last quarter, the highest rate of growth in a little over two years. Much depends on whether the trend continues, according to Mirae’s Agrawal. “Global liquidity is high and if India delivers, there is room for more upside,” he said.

Foreign institutional investors have been net buyers by Rs 84,051 crore so far in 2014.