BS BFSI Summit: Market gurus say valuations limit near-term upside

BS BFSI Summit: There is limited room for PE multiples to move up and return expectations going ahead have to be moderate, analysts said at the Business Standard BFSI Insight Summit

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Despite the Indian economy being on a structurally sound path, the equity valuation 'premium' for the Indian stock markets has 'limited room to expand' in the short-to-medium term, stock market gurus said at a panel discussion at the Business Standard BFSI Insight Summit on Thursday. That said, a person’s investment horizon is key for making returns from the market, they concurred.

 

The price-earnings (PE) multiple of Indian markets, said Prashant Jain, chief investment officer at 3P Investment Managers, are 20-30 per cent higher than their long-term averages, which has resulted in expansion of the premium of Indian markets over other emerging markets as well. 

  "To a large extent, this is justifiable as India’s prospects appear better as compared to the last 10 years. A lot of improvement has taken place in India in terms of reforms amid lower inflation. However, there is limited room for PE multiples to move up and return expectations going ahead have to be moderate," Jain cautioned.   

At the global level, however, no other equity market offers the rate of growth as seen in India, according to Vikas Khemani, founder, Carnelian Asset Management. This, he believes, will see investors chase Indian equities, and as a result, valuation multiples are likely to expand over time.

 

For Sunil Singhania, founder, Abakkus Asset Manager, PE ratio in isolation cannot be the sole indicator whether the market is expensive or not. That said, as value conscious investors it is an important factor to consider. Investors, he said, should be able to digest market volatility if they are to make money over a long period of time.

 

"Good things will always remain expensive. If the return expectations are in line with the profit growth of companies, there is no need to get worried about 19 – 20x PE. There have been euphoric times when the market PE has been around 35 – 40x. Looking at the dynamic situation and how companies are evolving, the composition of the markets will also change. While we are expensive, returns (from the market) will definitely be made over time," Singhania said.

 

The markets have yielded a return of around 15 per cent over a long duration, Singhania is not tempering the return expectation yet. Investors, he cautions, need to be rational while investing now. 

 

 

"Equity investors become partners in the business, and the returns they earn will be equal to the profit the company earns. Investors should now be comfortable with the returns that equities give in the long-term," Singhania said.

 

Eye on long-term

 

That said, the panel agreed that despite the structural reforms that the country had already seen, there was scope for further growth, ensuring India continues enjoying premium over other EMs over the long term.

 

"A lot of good work and formalisation is taking place in the MSME sector and they are growing really well. Coupled with increased manufacturing activity, which is going to be a very big base for India, there will be a significant rise in corporate profitability. We invest with a 7 – 10 year perspective," Khemani said.

 

Indian markets, according to Jain, have faced external risks but have seldom impacted India’s economic growth. India, he believes, has structural growth drivers, which should sustain. 

 

"Our markets have suffered in the past whenever there have been headwinds, especially around Covid. This time around, however, things are likely to be different as domestic flows are strong. Domestic investors have evolved. Local flows are quite structural," he said.

 

Back in the 1990s, India, Khemani said, was among the 'Fragile Five' owing to high fiscal deficit and a weak currency. Valuations of asset classes, including equities, he believes, is based on three factors: yield, earnings growth, and the discount rate.

 

"India's return on equity, at around 15-16 per cent, is among the best globally. Even a conservative projection places earnings growth between 15 and 20 per cent, making India best placed among global markets," Khemani said.

 

However, consumption in India, Jain said, over the last few years has been supported by equated monthly installments (EMIs) and leverage, which has pushed the household to gross domestic growth (GDP) ratio higher. Growth in consumption, he said, should be moderate going ahead.

 

"In fact, we are seeing a rise in non-performing loans from the low-ticket loans. Besides, the growth in goods and services tax (GST), which has been at 9 per cent per year, may be difficult to hold ahead as a catch up from less formalisation to formalisation of the economy has happened. So, I don't think the corporate profit to GDP ratio, which India touched at 7 per cent in the pre-Lehman era, will be crossed in a hurry," he said.

 

Singhania, too, said that India's economic journey—from a virtually zero-dollar GDP at independence in 1947, to reaching $1 trillion in 2007, $2 trillion in 2014, and a projected $4 trillion by FY2 is a testimony of its resilience and growth potential.

 

While Jain is cautious on small-and mid-caps, Khemani suggests remaining selective in these two segments as there still are investment – worthy pockets. “Don’t invest in fads and out of fear of missing out (FOMO), Khemani advises.

 

"While there will always be domestic issues that will worry the markets, investors need to look beyond these worrisome points and invest for the long term," Singhania said.