Indian valuations not stretched: Merrill

Investors are expected to get a 22.8% return on equity for the current year and 22.6% in the next year.

Barely a fortnight into the New Year and India still continues to be among the best performing among emerging markets, bettering on the averages of global emerging markets (GEM) on most parameters.

The valuation of Indian markets are not stretched despite the surge in inflows by foreign institutional investors (FIIs) and the index at 6200-plus levels, according to a DSP Merrill Lynch report.

The current price-to-earnings ratio is at 18, based on 2005 earnings it is estimated at 14.40 and based on 2006 earnings it is at 12.10. Compare this with GEM aggregate figures at 16, 10.70 and 9.8, respectively.

Andrew Holland, chief administrative officer and executive vice-president-research, DSP Merrill Lynch said, "China is the only economy in Asia offering competition to India, though China's earnings growth is expected to lag India in the next two years.

"The GEM aggregate factors in the emerging markets in Asia, Europe and South Africa and Latin America. India's gross domestic product (GDP) is forecasted to grow at 6.2 per cent in 2005 against China's 8 per cent. In terms of inflation both are almost on par. Investors in Indian stocks are expected to get a 22.8 per cent return on equity for the current year and 22.6 per cent return in the following year," according to estimates made by Merrill Lynch Research. The comparable aggregate figures for GEM are 19.30 and 17.90, respectively.

In terms of earnings growth, India is estimated to lag behind the GEM average. During the current year, the growth is expected to be around 25 per cent against the global average of 49.30 per cent.

However in 2006, India's earnings growth is estimated at 18.7 per cent against an aggregate of 8.8 per cent for GEM.

The Chinese market is undervalued - currently its P/E is at around 12, and based on the current year's and next year's earnings estimates it is expected to stay at around nine. China's corporate earnings are expected to be at 36.3 per cent for the current year but 0.6 per cent for the following year.

Interestingly, emerging markets the world over, on a rough average, show almost the same figures, suggesting that most of these economies are at the same stage of development.

In terms of earnings growth while Asian markets are expected to outstrip others during the current year, next year's earnings growth are expected to dip sharply compared with emerging markets in Europe, Africa and Latin America.