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    HomeBusinessEquity valuations remain pricey despite corrections: India P/E multiples down but still...

    Equity valuations remain pricey despite corrections: India P/E multiples down but still more than peers

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    However, the multiple is higher compared with 16.4 times for the Jakarta Composite, 11.6 times for the Taiwan TAIEX and 10.1 times for the KOSPI. Other markets such as Shanghai Composite, Brazil are even less expensive.

    Despite a steep correction in equity markets, India remains expensive compared to its peers. The market could remain expensive if the downgrades in profit estimates, post the earnings season, are significant.

    From the peak of 18,477.05 on October 18, 2021, the Nifty closed at 16,240.30 on Wednesday, a fall of 12.1%. At its peak, the 50-stock gauge was trading at a price earnings multiple (P/E) of 22.74 estimated one -year forward earnings, according to data sourced from Bloomberg. That P/E multiple has now come down to 17.93 times, closer to the ten-year average multiple of 16.79 times.

    However, the multiple is higher compared with 16.4 times for the Jakarta Composite, 11.6 times for the Taiwan TAIEX and 10.1 times for the KOSPI. Other markets such as Shanghai Composite, Brazil are even less expensive.

    Gautam Duggad, Head, Research, Institutional Equities, Motilal Oswal, believes valuations are now in the fair value zone and earnings would decide how they move. “Rising rates and monetary tightening will be headwinds and any correction in commodity costs and inflation would be a tailwind,” Duggad said.

    Shiv Sehgal, President & Head, Institutional Equities, Edelweiss Securities, observed that with valuations now closer to the long term average of 17 times, the froth has been removed. “Given the much stronger corporate balance sheets and cost structure, some premium is justified so valuations are no longer a concern for equities, ” Sehgal said.

    While the complete picture will be known soon, the earnings estimates for FY23 could see a meaningful revision. While an estimated 30% of corporate results are seen to have come in below expectations, another 15% of them have met estimates. However, even where companies may have reported strong numbers, the forecasts will reflect future challenges such as rising inflation, elevated crude oil prices and weakening demand in the local economy as interest rates rise. As of now, the economy is expected to grow at around 7-7.2% in FY23.

    Vinod Karki, Head – Strategy, ICICI Securities, pointed out that the valuations have been high because earnings were going up by 9-10%. “ With GDP growing and the market trading just about 3x price to book, I think we are close to all time averages. Moreover, the froth of high valuations is no longer there, ” Karki told FE.

    “Overall, the interest rates are going up and the liquidity is going down in the markets. If the market remains at similar levels for at least two more quarters, the valuations will turn cheap,” Karki said.

    Not surprisingly, the March quarter results show a variance between sectors that consume input materials whose prices have surged such as consumer staples, durables, automobiles and cement and producers of metals like steel and aluminium. There are sectors such as IT and BFSI that have not been impacted by commodity inflation; in the case of technology wage inflation and attrition have been a problem. The banking sector has done well largely due to lower provisioning for loan losses.

    Motilal Oswal wrote on May 10, profits for 25 Nifty companies had grown 26% y-o-y in Q4FY23 better than the estimate of 22%. Excluding BFSI, the profits for these Nifty companies would have grown 19% y-o-y, compared with the estimated 15% y-o-y. For the 91 companies within the MOFSL Universe, profits rose 31% y-o-y against the estimated 24% y-o-y.

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