The Hindu Business Line : Investors should demand more dividends

INDIAN equities offer one of the highest inflation-adjusted real EPS growths in Asia and emerging markets. But, Mr Adrian Mowat, Asian Strategist, for Hong Kong-based J P Morgan Securities (Asia Pacific) Ltd, feels that the high profit retention and low payout culture of the domestic companies is going to push down RoEs and may make the Indian equities unattractive.

Excerpts:

Are Indian equities really attractive for the global investor?

No, if one solely looks at valuations. Indian median PE is equivalent to that of the US equities and one of the highest in Asia (ex Japan) and emerging markets. However, the Indian market's dividend yield is the lowest in non-Japan Asia. This makes the market less resilient to shocks.

But India offers one of the highest real (after adjustment of inflation) EPS growth rates in Asia and emerging markets.

Capital management by the Indian companies has been consistently superior to that by the Chinese companies. Corporate governance and transparency in India is significantly better than Russia. Brazilian real growth still trails India. So, India is arguably the top BRIC (Brazil, Russia, India and China) market for long-term investors.

Is any specific investment model emerging for Indian equities?

I hope not; new models for investment usually signal the top of a bull market with healthy RoEs and consistent earnings growth plus healthy distribution to shareholders. India has the first two, yet fails at the last test. Payout ratios in India are too low.

Very few companies can justify retaining the level of earning that is currently retained. If current habits are sustained, then RoEs will fall and the market will gradually de-rate.

Investors should demand more dividends. Local demand for equities is slowly changing. This has the potential to be the dominant driver of the market in the future.

Are Japanese and Koreans going to set a new investment trend in Indian equities?

I doubt this will be the scenario. Justifying a bull market based on inflows from marginal investors is dangerous. In our view, the local savers have the potential to generate a new trend. Increased contributions to index-linked insurance products and systemic investment plans (SIPs) are already encouraging as a source of demand for Indian equities.

What may trigger greater overseas investment in the local stock market?

Ask what will trigger India's $100 billion of annual household savings to buy equities. Our view is that the local investors will be net buyers. If locals are net buyers, then FIIs are by definition need to be net sellers (but at a higher price).

How significant is the recent correction in the local benchmark indices?

It has been in line with global emerging markets.

Is weakening rupee against the dollar going to slow down global fund flow to Indian equities?

Yes, a weak rupee is negative. It discourages inflows and encourages the exporting of capital. However, in the past two years the rupee has not shown any strong trend. Our view is that the Chinese currency will appreciate over the next twelve months by more than 10 per cent against the US dollar. The rupee is likely to be dragged higher by this.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
MFs' asset base moves up sharply

It looks like that the worst is over

Benchmarks may correct downwards

SEBI nod for Compulink IPO

Investors should demand more dividends

Satyam, Sify sizzle