As Indian equity benchmarks Sensex and Nifty50 have scaled record highs after a gap of 13-odd months, Dalal Street is once again abuzz with talks of stretched valuations. Late participation by the heavyweight banking pack — gauged by the Nifty Bank index — has aided the final leg of the rally in the Nifty50 to the peak after coming within inches of the milestone several through much of 2022.
So what do Indian valuations suggest for the long-term investor at this point?
Gary Schlossberg, the Global Strategist at Wells Fargo Investment Institute, told CNBC-TV18 that valuations remain an issue for India. He expects the growth outlook to soften over the next 12 months. "We could see interest rates level out and come off a bit of the pressure off local valuations in India," he said.
A slowing pace of hikes in COVID-era interest rates in the US and other major economies such as India is driving optimism on Dalal Street.
"Indian valuations are at a premium to international markets at lifetime highs over the emerging markets," Mithun Aswath, Managing Partner at Kivah Advisors, told CNBC-TV18.
What does it mean when P/E rises?
The price-to-earnings ratio — also known in market parlance as P/E — is a critical metric that determines the price investors are willing to pay for each rupee of profit made by a business.
For instance, a P/E of 20 means investors are willing to shell out Rs 20 for every Re 1 profit made by the underlying business (in this case, the 50 Nifty members).
Typically, a Nifty50 PE of more than 25 means the market is expensive — or overpriced, and vice versa.
Investors can expect earnings per share (EPS) of around Rs 820 for the Nifty50 for the year ending March, according to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
The Nifty's EPS — a key measure of profitability for the 50-strong basket — had stood at Rs 793 for the year ended March 2022.
"The EPS for 2022-23 is likely to be mainly driven by financial stocks. The road ahead for banking stocks appears bright. Signs of CAPEX augur well for industrial companies," he told CNBCTV18.com.
Vijayakumar doesn't see significant disappointments in earnings in the October-December and January-March quarters.
Still, is there more upside on the horizon?
Schlossberg continues to believe India is an attractive emerging market. He expects the RBI to maintain rate hikes, keeping pace with the Fed for now.
"As far as the Feds is concerned, we are leaning toward a 50 basis point rate increase based on the economic data that we have seen of late, particularly the fact that inflation here in the United States has peaked."
Major central banks are taking up sharp hikes in benchmark interest rates to tame inflation but just as much to ensure it doesn't hamper economic growth.
"Overall, the market will remain cautious toward the Fed's policy outlook. As we move into 2023, we expect to see those rate increases stretched out and modified quarter-point increases, perhaps two or three in 2023," he said.
