Dalal Street Investments

Why Indian StockMarket Quoting at High P-E ?

June 12, 2017

We already put out on Twitter that we are booking profits. As against the historical average multiple of 14.7x, the Nifty currently trades at 17.8x i.e, 20% premium. Over the last 10 years, the market has traded above this multiple for only 3% of
trading days.

Earnings growth trend also does not appear to be particularly attractive with earnings revisions still happening on the downside. Hence valuation comes up as a key investor concern in most investor interactions. Our starting PE vs 12M forward return analysis implies only low single-digit returns over the next 12M and high probability of negative returns.

What is Causing the Valuations to Sustain at High P-E Levels ?
While flows would be critical to sustain these valuations, we tried to estimate how much flow would be required. For that, we compared historical monthly market returns/PE change vs flows. We looked at the flows including foreign & domestic institutional flows, equity raising and buybacks excluding those from promoters over the last 12 years. Analysis suggests that net (of equity raising) institutional inflows of 0.05% of free float would be needed. That would be US$400 mn / month.

Further, the IPO equity offerings of US$17bn/year which is more than double of FY17 and the highest this decade. To conclude, we estimate that ~US$5bn/year of net institutional inflow or ~US$400m/month is quite likely and hence a double-digit market return is still likely from hereon provided Government spending accelerates without significant loss of jobs in any sector.


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