Are The Indian Markets Overvalued

The Indian markets are touching new highs everyday and along with that the market barometers are also touching new highs for last few months. People may call this rally as a ‘NaMo’ rally or a ‘FII’ driven rally. The reason might be anything, but are the domestic market overvalued at current market situation?

We have highlighted some of the market valuation parameters to guide our retail investors on valuation front comparing with domestic market conditions at 2008 all-time high. Further, there are few companies which are present in these market barometers and trading at considerable lower levels from 2008 prices. Investors may look at investment opportunities in these stocks as some of the stocks are down due to the macro-economic conditions instead of company specific concerns. Here is a deep inside of India's major listed companies at current market scenario vis-a-vis 2008 scenario.

The Indian market barometers have crossed its lifetime high and are sustaining their gains at these levels. The 50 share Nifty index closed at 6589 yesterday, 4.7% higher than 2008 lifetime high of 6288. As the elections are nearing and the scenario is panning out for the change of regime, the domestic markets started showing traction and momentum. While it’s interesting to see whether, the markets are overvalued or it's a good time to start investing at current level. At the current all-time high level, the Nifty50 index is trading at a current price to earnings (PE) ratio of 18.5x current EPS. The price to book value ratio (PBV) of the Nifty50 is 3.12.

However, the situation in 2008 was completely different when we compare it on valuation front. On January 8, 2008, Nifty50 index touched lifetime high of 6288 and the market tanked like anything in next few months, touching as low as 2524 on October 27, 2008. This dramatic correction could be the biggest opportunity for the investors to accumulate quality stocks as the Nifty50 index breached its 2008 lifetime high and reached to new lifetime high of 6312 on November 5, 2010. Within a time span of only couple of years, the Nifty50 index gave a handsome return of 150%. Now, when we compare the valuation parameters, the index was trading at a PE ratio of 28.29x and 25.59x at 2008 and 2010 lifetime highs respectively. The PBV of the index was at 6.55 and 3.97 at 2008 and 2010 lifetime highs respectively.

Hence, one can definitely consider the current market levels at discount to previous 2 lifetime highs' valuation parameters. Furthermore, investors can still expect upside in the market despite of the markets trading at lifetime high. There are chances of the domestic market showing negative returns over shorter time period, the longer time frame investment looks to be very rosy. However, all stocks in the index did not appreciate similar to the overall index. There are few stocks which are not down considerably from their 2008 price levels. The underperformance of these stocks is mainly because of the macro-economic factors rather than company specific factors.

Over last few years, few sectors such as steel, power and infrastructure are affected due to the slowdown in capital expenditure and tight liquidity in the economy. Lower demand, delayed projects, coupled with higher input cost are the major reasons for the slowdown in these sectors. Jindal Steel & Power leads this table of underperformance with a 92% plunge from its 2008 levels. Another steel company, Tata Steel is also down by 59% during the same period, and ranks fifth in the table. DLF and Jaiprakash Associates, the leading real estate and infrastructure companies’ rank second and third with 85% and 84% underperformance since 2008 levels.

Due to slowdown in capacity expansion, the leading capital goods company BHEL is down by 62% from its 2008 levels. Subdue economic environment and concerns over cheaper coal supply forced power companies such as NTPC and Tata Power Company to post 57% and 49% negative returns during the same period. Other underperforming companies are IDFC, Reliance Industries and Bharti Airtel posting 50%, 41% and 40% negative returns during the said period. These underperforming stocks may become future investment opportunities once the macro-economic factors improve in coming few quarters.