‘Dr Doom’ Marc Faber, a perennial bear investor who has been surprisingly bullish on Indian stocks, has started turning a little cautious on Indian equities. In an interview to CNBC TV18 this week, Marc Faber — renowned investor and author of Gloom, Boom & Doom report — reiterated his belief that the Indian equity markets will outperform the US markets over the next 10 years, but added a note of caution over valuations, given the recent run up in the benchmark indices.
Further, Marc Faber also raised concerns on the valuations of individual stocks which have high P/E multiple ratios of 50x or above. “Some Indian valuations are around 50 times the earnings, which I would regard to be on the high side,” Marc Faber said in the interview. Even though he conceded that a collapse in such stocks may not be immediately due, Marc Faber said that he would still not buy such stocks.
“The stocks may not necessarily collapse right away… maybe they would actually go to 60 times the earnings or even 70 times the earnings,” Marc Faber said, adding that a lot of things have to fall in place perfectly to buy those stocks at so high valuations, and that he would rather stay away from such shares. “I am just saying that once you pay 50 times the earnings for a stock, everything has to go perfectly well to justify that valuation. I wouldn’t buy a stock at 50 times the earnings,” he said.
Indian equity markets are on a rampage of late. Benchmark equity indices Sensex and Nifty have risen over 21%-22% so far this year since January, with NSE Nifty-50 hitting a historical five-digit mark of 10,000 points for the first time ever. With it, the sentiment has lifted several stocks to unprecedented levels in terms of valuations. Within the NSE Nifty 50 universe itself, there are at least four stocks trading above the price-earnings multiple of 50 times of above — a level too high to justify investment by Marc Faber’s standards.
Bharti Airtel Ltd ended at Rs 413.35 on Friday and has rallied over 45% since its November lows after demonetisation. The shares of India’s largest telecommunication services provider are trading at over 61 times earnings. By contrast, shares of Reliance Industries, whose Jio telecom service is the main competitor pressurising Bharti Airtel’s margins, are at a P/E multiple of 16 times.
Asian Paints Ltd, at Rs 1,152.85 at Friday’s close, has a price/earning ratio of over 60x. The stock of the paints and chemicals company has rallied over 35% since its December lows. Earlier this week, Asian Paints said its fiscal first quarter net profit fell over 20% on-year to Rs 440.74 crore, missing most analyst estimates by a wide margin.
Hindustan Unilever shares, which ended at Rs 1,154.1 on Friday, have a P/E multiple of over 56x. The stock is up over 47% from its last low levels seen in December. One of the leading FMCG companies in India, Hindustan Unilever is one of the firms expected to get a huge boost from the growth in local consumption and ease in movement of goods following the implementation of GST earlier this month.
Bosch Ltd shares are not just expensive by their P/E multiples, but by their prices as well. At Rs 23,768.55 on BSE at Friday’s close, Bosch shares have a price-earning ratio of over 50x. Since November, Bosch shares are up over 32%.
Not only this, there are at least four other Nifty 50 shares which are at a PE multiple of between 40x and 50x. Cement maker ACC Ltd and farm tractor and commercial vehicles maker Eicher Motors are at respective Price-Earnings multiples of over 48x and 47x. Whereas, pharmaceutical major Cipla Ltd and another cement maker Ambuja Cements Ltd have P/E multiples of over 45x and 41x respectively.