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Re-rating time - Views on News from Equitymaster
 
 
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  • Jul 3, 2003

    Re-rating time

    It is not uncommon to hear that Indian equity markets are undervalued and one should look at building his/her portfolio with a long-term horizon in mind. Also, we know all the fundamental reasons why one should invest in Indian equities. However, certain facts and figures can strengthen this argument further.

    Source: Statistical Outline of India 2002-03
    Note: December 2002 onwards, P/E is derived

    To begin with, the BSE Sensex’s P/E is currently hovering around its lows (as evident from the graph above). Of course, here the comparison is not with the absurd and unjustifiable P/E levels achieved during the tech boom, but rather with the periods before and after the 2000 boom period. The Sensex currently trades at 13x trailing twelve-month earnings, which is lower compared to the monthly average of 16.9x since January-1998.

    Market cap. of leading economies
    Countries Mkt. Cap. (US$ bn)* GDP (US$ bn) % of GDP
    UK 2,200 1,600 138%
    USA 14,000 10,440 134%
    Singapore 120 100 120%
    Taiwan 300 300 100%
    Japan 2,250 4,000 56%
    Germany 1,100 2,100 52%
    China 525 1,300 40%
    India 115 500 23%
    *Approximate as in 2002

    This valuation of the index is not a fair representation of an economy, which continues to grow at an average rate of 5% compared to developed nations. Among developing countries, India is the second fastest growing economy. However, the growth in output does not seem to be reflected in terms of market capitalisation. Just to put things in perspective, India’s market capitalisation at the end of 2002 was just about 25% of its GDP as compared to China’s 40%, Taiwan’s 100% and USA’s 135%!

    (Rs mn) FY96 FY03 CAGR growth (%)
    Sales 688,164 2,316,162 18.9%
    Operating Profit/EBDIT 150,947 729,742 25.2%
    Net Profit/PAT 60,361 227,368 20.9%
    Market Capitalisation 1,449,162 2,512,128 8.2%

    Of course, valuations have to be supported with earnings growth. The CAGR growth of BSE-30 companies on different parameters are undoubtedly praiseworthy. In the last 7 years, compounded topline growth of almost 19% and a bottomline growth of nearly 21% could be the cause of envy for many a nation. Keeping this in mind and the fact that other developed markets are trading at much higher P/E’s, it is only time that Indian markets deserve a re-rating.

     

     

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