The Hindu Business Line : Valuations: Where India stands

‘To shrink is in’ suggest the global events of 2008, be it the shrinkage in GDP growth, liquidity, exports, industrial production or valuations. The country with the most promising growth story - China – boasted of a price earnings multiple of 44 times a year ago, only to be beaten down to 14.4 times its (trailing twelve month) earnings now. India’s Sensex P/E multiples contracted from 27.9 to 11.8 over this period.

Though the US was the eye of the storm, emerging market stocks had the worst battering.

Bearing the brunt

Emerging Latin American countries for instance were victims not only of the slump in the U.S economy but also tumbling commodity prices. While these concerns have already led to earnings downgrades, emerging markets has also been at the receiving end of selling by institutional investors thus further depressing valuations. The sharp correction also suggests that stock market participants have at least partly discounted earnings risks over the next year. Bloomberg estimates suggest that the Sensex is trading at 9.6 times it one-year forward earnings, its lowest level since 2000.

Since India’s prospects now seem to be tied to those of emerging markets, are the valuations attractive given the risk of slower earnings growth? According to global asset manager- Schroders’, the P/E for emerging markets is at about 7.5 times next year’s corporate earnings; this is far lower than the region’s long term average of 13. Jack Dzierwa, a Global Strategist at US Global Investors mutual fund also points out that the current emerging market P/E of about 8 is at a record low compared to the average of 15 since 1992. The ratio was 12x during the crisis following the Russian default in 1998 and 10x on the internet bubble and bust.

Seen against historic levels, the valuations of emerging markets do look compelling provided that commodity prices have bottomed out and the stimulus packages in the emerging nations help domestic growth.

India’s valuation

Where does India stand on valuations vis-À-vis its emerging peers? According to Bloomberg data, a good number of emerging continue to trade at a discount to India (see Table). While this may suggest that India still remains expensive, other interpretations are also possible.

For one, the discount on many emerging nations is a function of their higher reliance on commodities or exports, key pain points in the current crisis. On the other hand, India as a net importer of commodities is actually a beneficiary of the commodity downturn.

Two, countries such as China and India (that are still at a premium) have rolled out more policy initiatives through monetary and fiscal stimulus aimed at reviving the economy. Further, the IMF’s estimate of India’s GDP growth (at 6.3 per cent) in 2009, places India second only to China’s estimated growth, which is perhaps why the valuations of both these nations enjoy a premium.

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