Overstretched valuations not a concern

With the Sensex currently flirting with 8,200 levels, quite a few have expressed worries about the expanding market valuations.

At today's closing of 8189 levels, the index is ruling at a trailing 12-month P/E of 16.96. Recently research firm UBS had noted that India is among the most overvalued markets in Asia.

According to an estimate by Merrill Lynch, India will continue to be highly valued among Asian markets on 2005 forward estimates. As per Merrill estimates, Indian markets will command the second highest valuations at 14.30 times after Singapore (15x) by the end of 2005.

However, considering the expected earnings growth of close to 20 per cent, Indian valuations are still attractive compared to many other Asian markets, note analysts. However, statistics reveal that corporate earnings growth may be slowing down.

According to analysts, corporate earnings growth cannot sustain at 25-30 per cent forever and a more sedate 15-20 per cent is a realistic number. But while that may be a concern, many other Asian countries are likely to post lower earnings growth rates.

The Sensex earnings growth of 26 per cent for the 2005 June quarter reinforced the fact that the trend that started at the end of 2004 continues.

At present levels, Sensex is the highest priced index amongst all the Asian markets. According to Jaiprakash Sinha, assistant vice president - research at Kotak Securities, the valuations are already over stretched. But even at current levels the valuations are not their peak and is well below than the 24.7 in 1999.

However, valuations across Asian markets are slated to come down going forward, especially India's. Merrill estimates a P/E of 12.10 for India by the end of 2006, which compares favourably with markets like Singapore (14.10), Hong Kong (12.90) and Malaysia (12.80).

Apart from Singapore and India, Malaysia (14.20), Hong Kong (13.00), Taiwan (12.50) and Philippines are slated to be the next most highly valued markets as per Merrill's estimates for 2005. Thailand (8.90) and China (9.60) are slated to be the cheapest.

India is also slated to post the highest earnings growth (EPS) in 2005, behind only China. While Chinese growth for 2005 is estimated to be at 22.90 per cent, India is expected to grow by 20.40 per cent.

"At the present level of 16-17 of the PE, the projected growth should be very high, at more than 12 per cent in the future," says Sinha.

As for 2006 estimates India (17.40 per cent) ranks third behind Indonesia (24.10 per cent) and South Korea (19.10 per cent). Interestingly EPS growth in China is estimated to come down sharply to six per cent by the end of 2006.