Indian equities may sustain a discount to their long-term average and continue to appear cheap in the near future on that comparison. For, more than the price-to-earnings multiple of the benchmark index, it is the earnings growth which is likely to guide investor interest, say experts.
Generally, buying equities when the market falls below its long-term valuations is termed as a prudent fundamental strategy, especially for investors with a long-term investment horizon.
However, given that the outlook for India Inc’s earnings growth is increasingly getting subdued, this time around, the benchmark indices may continue to trade at a discount to their past averages.
?There has to be a substantial improvement in the earnings outlook before the price-to-earnings multiple expands and that does not look likely in the near term,? said Andrew Holland, CEO-Investment Advisory, Ambit Capital.
Holland believes that even the current earnings season may not point towards a big rebound in profit growth in FY14 and, to that extent, the consensus FY14 estimates may see downward adjustments.
On Monday, the Sensex traded at 12.7 times its one-year forward earnings; its 10- and 15-average P/E multiple ranging 14-4.5.
Experts also see contained economic growth being the primary reason for the muted earnings outlook. They expect a revival in India’s GDP growth to drive the expansion of market multiple.
As per Sankaran Naren, CIO, ICICI Prudential AMC, a revival in the GDP growth, especially that of the industrial sector, could lead to the Street pricing in higher earnings growth in 2014-15. ?Even this alteration could lead to higher multiples,? added Naren.
In the quarter ended December, India clocked in a GDP growth of 4.5%, the lowest for any quarter in a decade. Various economists have pegged India’s FY14 GDP growth to range between 6% and 6.5%. An earlier study by FE revealed that in the last two decades, on an average, the Sensex earnings grew nearly two times the economic growth rate.
Nomura, in a recent note, said that unlike last year, earnings expectations have been a key factor in the performance of Indian stocks this year. In 2012, the rally was driven by a contraction in global risk premiums and improved sentiment due to government reforms.
Currently, estimates are pinning for an earnings growth of 10% to 15% for the the current fiscal.
However, in a recent note, Bank of America Merrill Lynch pointed out that Sensex earnings per share in the period may remain under R1,300, depicting an earnings growth of 8-9%.