While discussing the present state of affairs
in the markets, especially the valuations, two statistical parameters are used
most often – (1) The price to earnings (PE) ratio of the benchmark (e.g.,
Nifty50) and (2) the market capitalization to GDP ratio (popularly known as
Warren Buffet indicator).
Both these indicators may soon lose their
relevance, particularly in the context of Indian markets.
In next couple of years a large number of new
economy stocks may get listed. Many of the new economy stocks that listed
earlier may get included in the benchmark indices. Obviously, the old economy
stocks, especially PSU and cyclical commodity stocks will pave the way for
these new economy stocks. The point here is that the new economy stocks are
valued at multiple of revenue not profits.
For example, it is expected that in the next
Nifty reshuffle Avenue Supermart (198x PE) or Info Edge (500x PE) may replace
Indian Oil Corporation (5x PE). This will obviously inflate the composite
valuation of Nifty in PE ratio terms. At some point in time Reliance Retail
(100x PE), Reliance JIO (150x PE), Zomato (200x PE), PayTM (150x PE) Indiamart
Intermesh (80x PE) etc shall find place in the benchmark index at the expense
of Coal India (7x PE), BPCL (8x PE), NTPC (7x PE), Power Grid (9x PE).
Assessment of market valuation through Nifty PE ratio would become totally
meaningless at that point in time.
The Warren Buffet indicator has already become
less relevant in the case of Indian markets, in my view. This indicator completely
ignores the rise in private equity investments. In Indian context for example,
the equity investment in self owned enterprise and home equity has risen
sharply in past one decade, as compared to the decade prior to that. Besides,
the size of unlisted private businesses has increased significantly. Factor in
the estimated market value of Amazon India, Vodafone India, PayTM, FlipKart,
Honda India, Hyundai India, LG India, Samsung India, Apple India, etc. and you
will find this ratio running much higher than what the present statistic might
suggest.
So the present argument that Indian market is “expensive but nowhere closer to bubble territory” based on historical PE ratio trends, may become totally redundant. The market participants might have to evolve new parameters for valuing the market that would be appropriate in the evolving scenario.
Till then, Nifty50 is trading above 1SD 12 month forward PE and GDP to market cap has crossed the threshold of 100%.
