"Action expresses
priorities."
—Mahatma Gandhi (Indian,
1869-1948)
Word for the day
Anodyne (n)
Anything that relieves
distress or pain:
Malice towards none
Congress Party deserting the
path shown by Mahatma Gandhi, BJP deviating from path shown by Atal Bihari Vajpayee and socialists digressing fro the
path of Lohia have been the most unfortunate events in the history of
Independent India.
First random thought this morning
Rampur city, named after Katheria King Ram Singh, has been
declared as the worst out of the 111 cities evaluated on the scale of Ease of Living.
It is found to be one of the filthiest cities in the country.
This city of Nawabs, and erstwhile capital of Rohilkhand, is the
political base of two tall leaders Azam Khan of SP and Mukhtar Abas Naqvi of
BJP. Rampur Raza library still contains more than 12,000 rare manuscripts and a
fine collection of Mughal miniature paintings, highlighting its rich heritage.
Degeneration of the city is a matter of national shame, more so
for BJP which has two MPs from the city, one in LS & RS each, and rules the
state and Zila Parishad too.
YTD Indian equity benchmark
indices have materially outperformed their emerging market peers. The
outperformance has surprised many, given that there is no substantial
improvement in either macro fundamentals or corporate earnings. Actually many
parameters that have traditionally led Indian to underperform (e.g., oil
prices, rates, bond yields, INR depreciation, inflation, CAD etc.) have
worsened a bit lately.
The outperformance has made Indian
equities the most expensive in Asia. Currently, valuations of Indian equities
are above long-period averages. The Sensex trades at ~12% premium to its
long-period average PER. Sensex P/B of 2.8x is also above its historical
average of 2.6x.
The latest earning season and
management commentaries have highlighted that it is not reasonable to expect
any major surprise in earnings in near term. Given the current forecast and
valuations, it is very difficult to find triggers for further re-rating of
Indian equities.
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As per a recent report of Motilal Oswal Securities, over the last 12
months, MSCI India (+11%) has outperformed MSCI EM (+2%). Notably, over the
last five years, MSCI India has outperformed MSCI EM by 127%. Now, MSCI India
P/E is at a premium of 66% to MSCI EM P/E, above its historical average premium
of 44%.
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ICICI Securities, in a recent report highlighted how the margin of
safety in Indian equities is "low", as the valuations on most matrix
are approaching 2008 level.
As per ICICI Securities:
1. The current Cyclically Adjusted P/E ratio (CAPE) for the
NIFTY50 at 24x has touched +1 s.d. and is now approaching the range last seen
during 2007-08.
2. Market Implied Long
Term Growth Value, which measures the value attributed by the market to growth
in earnings beyond FY20 is 54% (A level last observed in 2008). The measure is
clearly indicating that markets are attributing the substantial value (54%) to
long-term growth in earnings than to current and near-term future earnings
(FY19 and FY20).
3. P/B is high despite the
Ind-AS impact of dividend being included as part of equity and not current
liabilities since FY17 and upward revision of ‘revaluation reserves’. Although
P/B appears much lower than the 2008 high of ~6x, it largely reflects the
significant fall in ROE from 29% in 2008 to 13% currently.
4. Bond – earnings yield spread at 223 bps (last observed in 2010
and 2013) has been widening thereby reducing relative attractiveness of
equities.
5. Valuations at peak
levels despite rising ‘cost of equity’ for Indian stocks. Risk- free rate as
measured by 10 year bond yields has been rising and currently stands at 7.7%.
There is evidence of rising equity risk premium for India in the form of CDS
spread on Indian sovereign bonds rising by ~ 30 bps since Jan’18.
Clearly, current premium valuations are relying too much on earning
surprises and any disappointment on earnings front could lead to sever
de-rating of valuations.
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(Source: Motilal Oswal Securites)
...to continue on Tuesday
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