Indian equities still expensive despite sharp correction

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Published: September 20, 2019 2:58:34 AM

Even in 2017, while consensus analyst estimate at the beginning of the year projected Sensex’ earnings to grow by 30.9% during the year, they actually grew by just 9.3%. Similarly, in 2016, while analysts estimated Sensex’ EPS to grow by 23.1% at the beginning of the year, the actual earnings declined by 1.2%.

Indian equity, expensive despite, sharp correction, market news, Sensex, EPS, FPI Between July 5 and September 19, the Sensex gave up nearly 10% of its value, eroding investor wealth to the tune of Rs 15.04 lakh crore.

Despite the sharp sell-off seen in Indian equities since the Budget, valuations are still at a hefty premium to its emerging market peers, data compiled from Bloomberg show. At close on Thursday, while the Sensex was trading at 17.33x of its 12-month blended forward earnings, most emerging market indices are trading at anywhere between 5.8x to 15.4x of theirs.

Between July 5 and September 19, the Sensex gave up nearly 10% of its value, eroding investor wealth to the tune of Rs 15.04 lakh crore.
Interestingly, Indian equities continue to command such a premium despite actual earnings per share (EPS) coming in much lower than what analysts estimate at the beginning of the year for the last several years. Blended 12-month forward estimates for the Sensex at the beginning of 2018, for instance, was Rs 1,819.7, while the index ended the year with an EPS of just Rs 1,341.82. This essentially meant that while analysts estimated Sensex’ EPS to grow by 24.4% at the beginning of 2018, the index actually ended the year registering a negative EPS growth of 8.3%. The year 2019 so far has not been an aberration with over 50% growth projection for the year against a paltry achievement of just 7.3% till September 18.

Even in 2017, while consensus analyst estimate at the beginning of the year projected Sensex’ earnings to grow by 30.9% during the year, they actually grew by just 9.3%. Similarly, in 2016, while analysts estimated Sensex’ EPS to grow by 23.1% at the beginning of the year, the actual earnings declined by 1.2%.

Credit Suisse prefers equity as an asset class in this low-growth but accommodative interest-rate environment locally as well as globally. “Valuations have come to a reasonable level, which should restrict major downside from here on despite weaker earnings growth,” the foreign brokerage said. Further easing by central banks should support emerging markets.

The brokerage also said despite earnings downgrades, India remains one of the fastest-growing equity markets and the year-to-date under-performance, the 12-month forward PE premium has contracted.

As always, with the market correcting due to heavy FPI selling since July 5, forward estimates have also started coming off, with the 12 month forward blended EPS estimate of the Sensex dropping by 1.6% to Rs 2,082.36 as of Wednesday.

Foreign portfolio investors (FPIs) have remained net sellers and have offloaded close to $875 million worth of equities so far in September. India has witnessed the highest foreign outflow among emerging markets since July, selling over $5 billion worth of shares, followed by an outflow of $1.31 billion from Thailand.

For the three months ended June 2019, net sales for a sample of 2,179 companies grew at a lowest pace of 5.9%, compared to 9.5% in Q4FY19 and over 18% for the quarter ended December 2018, data from Capitaline showed.

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