Indian markets are into euphoric times. In September 2010, the Nifty crossed the landmark 6,000 points and the Sensex breached 20,000, levels last seen 32 months ago in January 2008. The Indian markets are valued at 16x (times) FY12E earnings, at a premium to other emerging markets. YTD (year-to-date) CY10, FII inflows stand at over $19 bn, the highest so far. The euphoria is also spreading to the primary markets. CY10 (calendar year) is likely to end up as the year of highest domestic fund-raising in the primary markets. Technical indicators such as traded volumes and open interest are much higher compared to the last market peak of January 2008.
Growth is back and the major drivers are in place. We are optimistic of FY11 GDP growth being close to the potential at 9%. Good monsoon has raised expectations of a bumper crop in FY11 and the broader agricultural growth could turn up to 3.8%. Industry is riding on a capex boom to clock 10.3% growth (FY11). The service sector could emerge from a slowdown to register a growth of 9.7%.
In H2FY11, we expect a Sensex earnings growth of 22%, against 25% in H1FY11. The moderation in H2FY11 is due to a higher base (since recovery in corporate earnings commenced in Q3FY10). The Sensex earnings growth would be 20%, excluding the swing of Tata Motors and Tata Steel. In H1FY11 it was 5%. For FY12, we see Sensex earnings growth at 18% and a Sensex EPS of Rs1,259 (Rs1,068 in FY11E).
Sensex valuations in terms of P/E (price-to-earnings) are at a 10% premium to the historical 10-year LTA (long-term average) at 15.8x FY12E EPS (earnings per share.) In terms of P/BV (price-to-book value), valuations are at a 15% premium at 2.9x FY12E BV, with RoE (return on equity) at 17.8%?lower than the LTA of 18.7%. While the valuations are not excessive, we believe the data points matter?more so in the event of market extremes. Some sectors like state-owned banks, private sector banks, FMCG, metals and telecom trade at meaningful premiums to the long-term average. Sectors like auto, cement, engineering, pharma and utilities trade at similar levels to the long-term averages.
At the current levels of 20,000 Sensex and 6,000 Nifty, India is an interesting bottom-up market. Despite rich valuations overall, specific large cap stocks in high-growth sectors still hold the potential to deliver steady returns for the next two-three years.
Indian equity markets have delivered yet another quarter of solid performance, with benchmark indices rising 13-14% in Q3CY10. YTD CY10, India is one of the best performing markets globally, and is poised to be one of the earliest to scale its previous peak and create new highs. Indian markets are up 16% YTD CY10. Almost the whole of this upmove came in Q3CY10 alone. Given no major upgrades to corporate earnings, this run-up implies a sharp rise in market valuations. Currently, the Indian market is valued at 16x FY12E earnings, the highest among emerging markets. The valuation premium is high even after considering the fact that both earnings growth and RoE for India are among the highest.
While the average daily volumes have made a new peak in September 2010, it also marks a big rise MoM (month-on-month.) Similarly, the average open interest in F&O are at a new high. The only difference in the F&O segment is a big drop in the futures open interest as compared to the previous peak of January 2008.
The key factor driving up the market euphoria has been inflows from FIIs. YTD CY10, FII inflow stands at over $19 bn, the highest ever so far. Even more interestingly, of the $19 bn, $12.6 bn (65%) came in the September quarter alone. In fact, this quarterly figure is higher than the annual inflows of past several years (barring CY07 and CY09). Further, more than half of the quarter?s inflows were in the month of September alone.