Valuation of Indian equities still remain expensive, says Credit Suisse

The valuation for Indian equities remain expensive and some de-rating is warranted, given the general elections in April-May, said a note by foreign brokerage Credit Suisse.

The benchmark Nifty is trading at a 12-month forward price-to-earnings multiple of 17.1, versus the 10-year average of 15.3. 

Despite this, equity markets could gradually grind higher as corporate earnings are set to accelerate, says the brokerage, even as the RBI’s 25-basis-point rate cut provides further impetus to the economy. 

“The Q3 earnings so far portray good earnings momentum, which should get further fillip once the consumption stimulus, announced in the form of income transfer and tax rebate for lower income groups, starts to show its effect,” said  Jitendra Gohil, CFA and Head of India Equity Research, Credit Suisse Wealth Management, India.

The brokerage likes select names in financials, chemicals, construction materials, and IT, but is cautious on consumer companies given the overly stretched valuations. 

“While the structural outlook for consumer companies remains positive and the stimulus announced is good for these companies, it is difficult to ascertain the exact spending behavior at this point,” said Gohil.

Gohil further notes that the mid-cap space could offer bottom-up stock picking opportunities as the steep correction in recent days has made valuations more reasonable. The BSE MidCap index has dropped 7 per cent in the last one month.  

The valuation gap between Indian and global equities is narrowing. After outperforming its peers in 2018, the Nifty’s 12-month forward PE valuation of 17.1 has been largely flat in 2019, versus a valuation expansion of 11 per cent, 10.5 per cent and 10 per cent seen in the China, US and EM Index, respectively, in January. “We expect that the valuation gap with peers will narrow further,” says the Credit Suisse note. 

After materially outperforming global markets last year, the Nifty remained flat in January, underperforming the MSCI World and MSCI Asia ex-Japan Index by 8 per cent and 7.6 per cent, respectively. The underperformance was mainly due to foreign portfolio investors (FPIs) selling ahead of the Union Budget and stock-specific negative news flows that led to extreme risk aversion for some firms. 

Investors’ focus will now shift back to corporate fundamentals, the impact of consumption stimulus on corporate profits, global developments, and the general elections this year.