Following more than 7% gain in the equity market since the first week of September, the benchmark indices have pared the discount at which they were trading to their long-term valuations. While the Sensex and Nifty both are currently trading at fair valuations, some of the large-cap stocks are trading at a steep premium to their historical averages.
Currently, Sensex is trading at 14.8 times its one-year forward price to earnings ratio, compared with the historical average of 15 to 17. Even as this depicts nearly 10% discount to its five-year average valuations, this discount has contracted significantly in the last three-months. For most part of May and June, PE multiple stood at a 20-25% discount to its five-year average, sharpest concession since March 2009.
According to Saravana Kumar, CIO, Tata AIG Life Insurance, surplus global liquidity have rekindled the market sentiment and even foreign institutional investor interests. ?Given this change, the foreign investors seem preferring India?s sub 6% growth market compared to other emerging markets, including China,? added Kumar. FIIs have bought close to $15 billion of Indian equities so far this year, highest amongst the Asian countries sans China for which data are not available.
One-fourth of large-cap stocks from Nifty universe are on the whole trading at a 45% premium to their three-year average earnings multiples. DLF, Bharti and Maruti Suzuki are trading at 55-70% premium to their three-year average forwards. The list also includes stocks like Grasim Industries, Asian Paints, Siemens, Mahindra & Mahindra, Sun Pharma and L&T that are trading at a premium of 25% to 50%. Even cement players ACC, and Ambuja cement have seen their valuations being stretched by 49% and 45%, respectively of three-year averages. ?The steep valuations of some of the largecaps don?t necessarily reflect medium-term outlook of investors but long-term bets as sentiment has changed drastically,? said Holland. For example, DLF, the stock which was the laggard of 2011 with a 37% decline, has in so far in the year gained 28%, with a third of these gains occurring in the last three weeks. This high beta stock has been rewarded handsomely in the current rally as the company has restructured its assets and divested its hotel properties.
?The September quarter numbers are still expected to bear the impact of high interest cost and the Industrial production numbers in the last three months. However, the current valuations are not discounting these near-term glitches but opportunities in longer durations,? added Kumar. However, not many analysts are comfortable with the lush valuations of the largecaps.
In a recent report, Kotak Institutional Equities has shied away from giving strong investment ideas among large-cap names because it finds many of the stocks ?quite richly valued?, already discounting 2013-14 expected EPS (Earnings Per Share).
