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Indian equity market to witness significant risks to P/E multiples, say experts

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Published: January 9, 2019 2:57:08 AM

The current price to earnings (P/E) ratios of the BSE Sensex and NSE Nifty stand at 23.54 and 22.03, which has expanded over the years.

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The current price to earnings (P/E) ratios of the BSE Sensex and NSE Nifty stand at 23.54 and 22.03, which has expanded over the years. The expansion of P/E multiples has happened because of the lower cost of capital and that 7-8 year trajectory has started reversing now. “The simple trade that investors had of buying expensive stocks in India and hold for not just the earnings growth but multiple expansion is over,” warns Sanjay Mookim, a research analyst at Bank of America Merrill Lynch (BofAML). He further explains that investment-led pick-up is difficult to justify because utilisations for corporate growth in India is very low. India might not see any acceleration in corporate capex anytime soon.

“We are going to have a bit of a tough year. There could be a double digit fall. The election will create volatility ahead and market will see a significant risks to multiples. A lot of money has been made through multiple expansions in the last few years and that will have to be given up because the global environment is changing. As liquidity injection has turned negative and as a result India will not be decoupled,” added Mookim.

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However, the report adds that post election there could be some reversal to normalcy. There was rally in 2017 despite of higher rates because the liquidity was still positive. The only time the Indian equity market actually decoupled was when PM Narendra Modi was elected, wherein the Sensex and Nifty went up but emerging markets did not. After that India’s market has recoupled.

BofAML prefers financials and rural themes for the coming period. Mookim believes that the March quarter there will be reversals with cement companies that are going through the NCLT.

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