India: Mouthwatering valuations

Despite a smacking fourth quarter GDP growth rate of 9.3%, the Indian stock markets are going through a rough patch. While the GDP growth rate for financial year 2005-06 was a robust 8.4% against an expected 8.1%, FIIs seem to be disinterested in India's forward valuations.

At least the FII outflows in the month of May seem to suggest this.

FIIs have withdrawn as much as Rs 8,247.20 crore (Rs 82.472 billion) in the month of May. The 30-stock BSE Sensex, on the other hand, has lost 14.90% during the same period.

Data compiled by Antique Stock Broking using Bloomberg data reveals that India, as represented by the two-benchmark indices, the 50-stock Nifty and 30-stock Sensex, are trading at estimated (for FY07) price earnings, PE , multiple to GDP ratio of 1.5 and 1.75, respectively.

In stark contrast, other emerging market amongst the BRIC countries, Brazil is trading at an estimated PE/GDP ratio of 5.99.

Interestingly, Brazil has clocked a GDP growth of 1.43% for the fourth quarter of the current financial year against India's Q4FY06 GDP number of 9.3%.

On the other hand, the developed markets of the US, Canada, Australia, France, UK, Italy, Germany and Japan are all trading at more than four times their estimated GDPs. Their estimated GDP growth rate for FY07 in the range of 1.4% to 3.3%.

Even if India were to grow at a more modest 8.4%, India's valuations compared to other emerging markets like China, Mexico, Argentina look mouth-watering, believes Sumeet Rohra of Antique.

Speaking to CNBC-TV18, Ved Prakash Chaturvedi, CEO, Tata Mutual Fund, said, "My sense is that India remains a strong domestic growth story. The market PE multiple, maybe one year forward, is about 15 times. Come another six months, markets will be looking at '08 earnings when it would look even cheaper."

When asked if he sees much more downside from here, Chaturvedi said, "For an economy that is growing at 7% odd, for companies growing at much higher rates, I guess valuations will soon be looking very reasonable. In fact, there would be entry points."

In his short report titled 'India's Economic Growth Momentum Continues,' Rohra further argues that India clocked a 9.3% growth for January-March 2006 quarter despite going slow on reforms in the insurance, oil, telecom, banking, PSU privatisation and FDI in the retail segment due to demands of coalition politics.

He expects that the earnings of the 30 companies comprising the Sensex, to grow at a conservative estimate of 13% till FY08 and the corresponding earnings at Rs 725.

In conclusion, on a bullish note, the report states that ". . . we feel that even if the market trades at 18-20 times, the Sensex could well scale to 13,050 to 14,500 which translates into a 24-37.5 % upside in a 1-year time frame."