The party will continue

India's relative PEG valuations should continue to attract inflows

On the road to the discovery of India, 8000 is just another milestone. If India Inc keeps up the good work and the rain gods are merciful, the Sensex could be at far higher levels.

Of course, it certainly has run up very fast, and there's no doubt that it has been propelled by liquidity inflows. The question now is "" will the inflows continue?

One way of answering that question is to look at valuations. At 8000, the Sensex trades at a price to earnings (P/E) multiple of just about 15 times estimated FY05 earnings and 13. 3 times estimated FY06 earnings.

Compare this with India's peers in the region. South Korea trades at 10.7 times CY05 while Taiwan trades at around 13.7 times CY05. But these multiples need to be seen in the context of earnings growth.

According to one study, India's earnings growth for FY05 has been pegged at 20 per cent, for Taiwan it is 7 per cent in CY05, while for South Korea the growth is a negative 15 per cent. Taking the PEG ratio, therefore, India does not look that expensive.

There are other justifications. One of them is that the Indian economy is not only one of the fastest growing economy in the world, the growth is perceived to be sustainable.

India is far less dependent on exports and has a huge domestic demand which companies can cater to, which means that it is better equipped to weather a global downturn. The universe of stocks that investors can buy into is large, diverse and offers quality.

Indian companies have strong balance sheets, have built global-scale capacities and demonstrated their ability to deliver numbers, consistently.Given this, India's market capitalisation which is nudging $500 billion, does not probably reflect the nation's growth potential.

As a percentage of the world's market capitalisation, India accounts for less than 2 per cent. One reason for this is that the free float is relatively small because of which India's weightage in indices such as the MSCI, is relatively small.

As a result, fund managers who rely on such indices to make allocations end up allocating smaller amounts. With more and more foreign investors discovering India, there has, however, been a flood of money into the country.

While this may have pushed up valuations from a near-term perspective, one shouldn't lose track of the big picture. India is no longer simply the flavour of the season, it's far too important a market to ignore.

Any fund manager who has stayed away has already paid for it dearly -the Indian market is up 28 per cent between January and now and up a whopping 55 per cent since last September. So long as the money keeps coming into funds abroad, an increasingly larger chunk of it should come to India.

ONGC

The latest subsidy formula enumerated by the government to help oil marketing companies (OMCs) lacks cogency, point out analysts at brokerage houses.

Subsidy losses and under - recoveries for OMCs in FY06 are estimated at Rs 40,000 crore and upstream players would bear about a third of that, or approximately Rs 14,000 crore. ONGC alone is estimated to provide 85 per cent or Rs 12,000 crore of this burden on upstream players.

As a part of this burden, ONGC has been reported to provide a $20 a barrel discount to OMCs. However, analysts highlight that their calculations indicate the actual burden on ONGC would be about $14-15 a barrel, well below the reported figure.

ONGC's discount to OMCs in the last quarter was estimated at $13.9 a barrel compared with $5.4 a barrel in FY05. The subsidy burden on ONGC amounted to Rs 4103.8 crore in FY05.

Meanwhile, ONGC's current gross realisation are pegged at $62 a barrel compared with an average of about $41 in the corresponding period of the previous year. As a result, the company's subsidy burden is higher y-o-y, but realisations too have shown an upward trend.

Several analysts also highlighted that in the absence of specific details of oil marketing bonds and further clarifications from the oil ministry on subsidy guidelines, they are not making changes in their earnings forecasts for the oil and gas sector. The current consensus EPS estimate for ONGC is Rs 121.9 for FY06.

However, the general buoyancy on the street helped shrug off reports of another fire at ONGC's wells and the stock gained about 1 per cent on Thurday. Going forward, ONGC's latest alliance with Italy-based ENI is expected to strengthen its ability in the global oil and gas business.

With contributions from Shobhana Subramanian and Amriteshwar Mathur