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India a cheap emerging market relative to earnings growth

India has amongst the lowest valuations relative to its growth, coming in third amongst thirteen emerging markets.

With both its price/earnings multiple as well growth in the mid-teens, its PEG (Price/Earnings to Growth) ratio of 1 is higher than only Taiwan (0.9) and Korea (0.7). Those more expensive than it include Brazil(1.3), Singapore (1.9) and Malaysia (2.6).

The analysis is based on data compiled by JP Morgan.

“India valuations remain meaningfully expensive as compared to peer group in EM, particularly in the BRICs group in relative terms. But the premium could be justified in the backdrop of higher earnings growth forecast,” said its August 27 India Equity Strategy report note authored by Bharat Iyer, Bijay Kumar and Adrian Mowat.

Companies in India’s benchmark indices are estimated to have earnings growth of 10-11% for the current financial year, according to Bloomberg estimates. This is expected to be in excess of 19% for the next financial year.

Companies are likely to show a more robust set of numbers in the days ahead, agreed market experts.

Rakesh Arora, managing director and head of research at Macquarie Capital Securities said that India cannot be said to be overvalued.

“Indian valuations are not rich compared to other emerging markets except maybe China. However, any increased allocations to China have historically resulted in greater flows to India as well, on account of more money being invested in emerging market funds,” he said.

He added that more upgrades are likely to come in on account of companies’ operating leverage which will result in greater profitability as sales move up with the improvement in the economy.

“These are the early stages of the recovery and earnings are likely to pick up next year. There is also a lot of interest in India which has resulted in an increase in valuations,” said Ramesh Damani, member, BSE.

India is the third most expensive country in terms earnings multiples, with a P/E of little over 16, according to JP Morgan estimates. Mexico and Philippines are the only two other emerging markets which have a P/E of close to 20.

The P/E ratio looks at price as a multiple of current earnings. The PEG ratio also takes into account growth relative to the earnings multiple.

However, the higher earnings multiple has not deterred foreign investors.

Foreign institutional investors have been net buyers by Rs 77,571 crore so far this year amidst increased allocations from global funds, emerging market funds as well as Asia ex-Japan funds.

The allocation of Asia ex-Japan funds to Indian equities rose to 8% from 7.5% in the last quarter, according to the Morningstar Offshore Fund Spy report for the quarter ended June 2014. It added that emerging market funds raised their allocations from 7.9% to 8.3%, and global funds also raised their allocations from 2.4% to 2.64%.

Niranjan Risbood, Director Fund Research, Morningstar India said that the trend of rising India allocations has not changed.

“India is around 30% more expensive than a lot of other emerging markets, but growth rates are higher which may justify the premium. There is also the fact that Return on Equity (RoE-a measure of the returns companies are able to generate from shareholder capital) is coming out of a trough and is likely to head higher in the days ahead,” he said.

Benchmark indices closed at all-time highs on Tuesday. The BSE’s Sensex closed at 27,019.39. The National Stock Exchange’s Nifty closed at 8,083.05.


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