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Strong inflow of foreign portfolio money into the Indian markets has pushed the benchmark Sensex to trade at a premium to most markets worldwide.
At 16.3 FY14e price-to-earnings (P/E), the Sensex is trading at a premium to most other emerging markets. Japan is the only market that is ahead of Indian equities in terms of valuations, a recent study by Mumbai-based financial services firm Motilal Oswal shows.
However, the study also highlights that the return on equity (RoE) of Indian equities is at a premium to global markets and thus higher valuations may be justified.
Moreover, India is the only market among the Bric nations that has given positive year-to-date returns. The Sensex has give positive returns of 8% so far this calendar year versus -11% by Brazil, -4% by Russia and -5% by China.
Foreign institutional investors (FIIs) have invested more than $16.2 billion in Indian equities since the start of this year, official data shows.
Despite the recent surge, benchmark indices are still below their historical average valuations. At 21,000 levels, the Sensex one-year price-to-earnings (P/E) trades at a 3% discount to its to long period average (LPA) and one-year price-to-book (P/B) is at a 11% discount to LPA.
Even with the Sensex touching life-time highs, as many as 17 Sensex firms are trading at a discount to their LPAs. Some of the notable names include Dr Reddys Laboratories, which trades at a 40% discount to its 10-year average P/E, followed by Bharat Heavy Electricals Ltd (BHEL) (38%), NTPC (32%), ICICI Bank (27%), HDFC Bank (20%) and Tata Motors (22%).
Tata Power Ltd at 27%.
Market capitalisation to gross domestic product (GDP) at 59% is far below the averages and closer to the lows of last decade, the study shows.
The performance in the current rally vis-a-vis the previous rally also shows a huge divergence in sector performance, the study said.
Technology stocks have led the current rally with y-t-d returns of 49%, followed by telecom (35%), healthcare (20%) and consumer (15%). In the previous rally (November 2010), consumer staples and healthcare stocks led the rally with 83% and 45% returns.
“Automobiles, healthcare and technology sectors are at attractive valuations relative to historic averages...Cyclicals are at discount. Global cyclicals are a huge discount to markets,” stated the study.
Public sector banks are at 46% discount to historical P/B and 74% discount to market P/B.