Sensex valuation at year low

The Sensex has declined 16 per cent from last October's levels. On trailing 12-month earnings, the index's valuation is at a year's low of 17 times, down from 24 times a year before. But do you know that Sensex is still among the richly valued global markets?

Sensex enjoys higher valuation than the Dow Jones, the Euro Stoxx and the Hang Seng. On estimated earnings for current year, the Sensex is more expensive at 14.8 times while the US benchmark Dow Jones is trading at 12.4 times, Euro Stoxx at 8.2 times and Hang Seng at 10.2 times.

What is the reason for the mark-up in price of Sensex? Business Line took a look at earnings projections for 2012-13 of global markets.

Though Sensex valuation is higher, Indian companies are expected to report higher growth rates than their global peers. Bloomberg estimates show that Sensex companies are expected to expand profits by 14 per cent in 2012-13. In this period, companies in the Dow Jones are expected to post 3.6 per cent profit growth and those in Euro Stoxx a growth of 0.05 per cent.

In the Asian pack too, most markets have lower earnings growth projections compared to India. Companies in the Hang Seng are expected to record 8.6 per cent growth, those in South Korea's KOSPI 1.4 per cent and FTSE Straits of Singapore a meagre 0.3 per cent growth.

Other Asian markets, however, trade at a higher valuation relative to their growth projections.

Nikkei trades at 15.6 times despite a lower 6.5 per cent growth estimated for FY13. Taiwan is another market trading at steep valuation — Taiex is at a PEM of 15 times with expected earnings growth at 9.9 per cent. Shanghai Composite, the benchmark stock index of China, is trading at price-earnings multiple of 11.7 times with earnings expected to grow at a pace similar to India (14 per cent).

While India may appear to be an island of high growth next year from the above numbers, the September quarter scorecard of India Inc has raised questions over its ability to keep up with market expectations.

Slowdown in demand in consumer sectors, slowing orders of capital goods companies, rising margin pressure for oil, coal and metal importers have all strained profit growth.

But, going ahead, corporate performance would improve, says Mr Sandip Sabharwal, CEO-Portfolio Management Services, Prabhudas Lilladher. “A 14-15 per cent growth estimate in my view is fair and conservative. Input cost pressures will be much lesser next year and in all probability we will be in a liquidity easing cycle with interest rates that are lower than current levels. As such earning growth next year could be better than the current pessimistic estimates. As per my view the worst and best case for the markets over the next one year based on our estimates of 2012-13 earnings is 15000 (at a P/E of 12X) and 26000 (at a P/E of 20X).”

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