Valuations for Indian companies remains high if one looks at the gap between earnings yield and yield on debt, according to the India arm of global financial services firm Morgan Stanley.
Morgan Stanley India Company Private Limited in a report dated September 25 and entitled ‘Framework Intact, Outlook Murky’ said that the gap is significant since rates are rising relative to the growth in the total value of goods and services produced by the country or Gross Domestic Product (GDP).
“Since real rates are high and rising relative to real GDP growth, the market cares about the equity yield gap and not multiples based on book value and earnings. The yield gap is negative, implying valuations are rich. Our 12M index target is 8% lower than today’s level,” said the report authored by Ridham Desai, Sheela Rathi and Utkarsh Khandelwal.
More From This Section
Meanwhile the fact that foreign institutional investors (FII) own around 40% of the free float could pose an issue in the even of a sell-off.
“Sentiment is rocky. FII ownership is an overhang. We are looking for capitulation at some point in the coming months,” said the report.