Vijay Kumar Gaba

The valuations of Indian equities, or the global equities in general, has become subject of intense debate, with participants analyzing the markets with personal biases and prejudices.

A variety of models, methods and timeframes are being used to justify the current valuations as reasonable, or reject these as unsustainably high. Many analysts have preferred to ignore the aggregate valuations and adopted different yardsticks for various classes of businesses.

Given that the benchmark Nifty has close to 38% weight of financial services, it may not be appropriate to give undue consideration to the aggregate PE ratio of the index for benchmarking the “market” valuation. Some analysts prefer to use global indices (e.g., MSCI India Index) to assess the valuations of Indian equities.

Many new age businesses which are solely focused on revenue growth and may not be profitable in short to mid-term. For these businesses applying the conventional valuation methods might not be appropriate.

Nonetheless for reference purposes, on conventional parameters, post the recent correction, the valuation of Indian equities may be marginally higher than the long term (10yr) averages, and do not appear to be a cause of significant concern.

However, midcap valuations relative to large cap is high; India PE premium over global PE is still quite high, and the risk premium (Equity yields vs Bond Yields) is very low. Therefore, the upside in short term may be limited.