India most expensive market globally

SENSEX@12000

India today is the most expensive market in the world. At 12,000, the Sensex trades at nearly 18 times the estimated FY07 earnings and just over 15 times the estimated FY08 earnings.

Forward valuations for 2007 for South Korea are at multiples of around 9, for Taiwan and Indonesia at around 11 times and at around 13 times for Malaysia.

At a disaggregated level, valuations are richer than ever. Forward trading multiples for Infosys are at 29 times, Hindustan Lever at 30 times, Siemens at 42 times and Bajaj Auto at 29 times the estimated earnings.

Some brokerage houses believe that the Sensex is overvalued by as much as 10 per cent with the fair value being closer to 10,900, saying that the rally over the last six months has been more the result of a re-rating of the market and consequent liquidity inflows, rather than any major upgrades in earnings.

However, according to one school of thought, the stronger growth of economy would result in earnings upgrades thereby making the market more reasonably priced.

Growth expectations for the economy have increased "�"� a report by Credit Suisse has projected GDP growth for FY07 at 8.5 per cent over the 8.1 per cent in FY06. A higher GDP, say analysts, should mean an upgrade in the earnings.

While that may be so for some companies, there are those who feel that results for the first three quarters of FY06 and the visibility for the coming year do not indicate any significant scope for an upgrade for the larger universe of firms. After three years of a 20-25 per cent rise in earnings, the earnings growth for FY07, for the broader universe of firms, is expected to be in the region of 15-17 per cent.

However, given that India is growing faster than any other nation other than China, there could certainly be some earnings upgrades. And even if they are not significant, the markets will continue to be expensive. That's because foreign fund managers believe that the fundamentals are intact and are willing to invest for the long term.

They are convinced that companies will deliver performance and are, therefore, willing to pay a premium to invest. Favourable demographics and changes in lifestyle apart, higher farm incomes too will continue to keep the demand for goods and services buoyant, resulting in continued growth for the corporate sector.