While few doubt stocks here are quoting at price-earnings ratios which are higher than those in peer countries, India's growth prospects are the key differentiator.

Andrew Holland
Managing Director -- Strategic Risk Group,
DSP Merrill Lynch

"Indian PEs are higher than those of others but we're looking at GDP growth of 10% and corporate earnings of 20-25%. This justifies the valuations"

The Indian market, as mirrored by the BSE Sensex, is today trading at a price-earnings (P/E) multiple of about 18-19 times FY09 estimated earnings. When compared with other markets in the region, it does appear at the higher end. For instance, the South Korean market is trading at 12 times forward for CY08 and so is the Taiwanese market, while the Malaysia market is trading at 15 times forward for CY08.

However, it must be kept in mind that India is also one of the fastest-growing economies in the world today, apart from China. And we believe that it will remain one of the fastest growing economies for the next few years. Therefore, I would maintain that the Indian market is not over-valued, albeit a selection of sectors and stocks remains the key to good investing.

While the consensus appears to be that GDP will grow at about 8-8.5 per cent, we are expecting a GDP growth of about 10 per cent over the next three years. That means better visibility of earnings compared with those in other emerging markets. That could also mean that there is a better chance of earnings upgrades.

Also, with the possibility of a slowdown in the US, several countries such as South Korea which are export-driven may suffer, whereas India will be insulated to some extent because its economy is largely driven by domestic demand. That's also why the visibility for Indian companies is better.

Today, in India we have several mid-caps actually trading at a discount to the large-cap stocks. In other developed markets, this might not have been the case. What's possibly happened is that several large-cap companies have been growing their earnings as fast as those of many of the mid-caps. As such, these stocks continue to trade at a premium. Going forward, the mid-caps should grow at a faster pace and the valuation discount should narrow.

Overall, we expect that Indian companies will quite easily turn in a 20-25 per cent earnings growth over the next three years, and we firmly believe that the earnings growth is sustainable.

The reason for our confidence, is once again, the strong GDP growth which will be driven by consumption demand -- which continues -- and also corporate capital expenditure. Besides, spending on infrastructure such as roads, ports and lately power, will help the economy grow.

We believe that the rural economy will surprise us with its growth in the near future. All this will lead to the operational gearing of Indian companies improving significantly. This, in turn, will be reflected in better earnings.

V P Chaturvedi
Managing Director,
Tata Asset Management Ltd

"Economies that have witnessed similar phases of rapid growth have shown similar trends in the pricing of financial assets"

Whether Indian markets are over-valued or not can be looked at from various perspectives. There is the historical perspective of having looked at the markets over the past few decades and the valuations prevailing then and now. On the other hand, there is a perspective of what has happened in economies which have gone through a similar phase of rapid expansion through the last century and valuations then prevailing in these economies.

But apart from these, there is a perspective of what the Indian economy and companies can deliver in the future, what value can they create and hence whether investors are wise or otherwise in investing in these companies at the current prices.

From a historical perspective, clearly, the Indian market has now sustained at a P/E level of close to and over 20 times one-year-forward-earnings for a prolonged period. Never before has the market quoted at such high P/E multiples for such a long period of time. When we look around, the prices of various asset classes including commodities, gold, real estate and equities, seem inflated.

Economies that have gone through similar phases of rapid growth, be it the US or Japan or more recently the East Asian economies, have shown similar trends in the pricing of financial assets. Thus, when compared with the rapid growth phase that other economies went through, the higher P/E multiples that Indian stocks now enjoy can be explained by the huge amount of interest invoked among local and global investors.

History has shown that over a long period of time, stock prices have to reflect the fundamental value that companies can create over a period of time. In my view, the Indian economy is at the beginning of its long-term growth phase. The growth of Indian companies is largely linked to domestic factors and these cannot be altered in short time frames.

Hence, a stable sub-strait of growth has been built which will drive corporate growth and, in turn, stock prices. Let us also for a moment look at the fact that over the past few years many more individuals in India have looked to stock markets to deploy their savings and now every month a large amount of money is coming to the stock markets from domestic sources.

Again, the history of global markets shows that once domestic investors start buying in significant numbers, the stable pool of inflows can keep markets buoyant over long periods.

In summary, though from a historical perspective, markets may look over-valued, given the potential of value creation that Indian companies have as well as the fact that both from local and global investors there is significant increasing appetite for Indian financial assets, we can expect this buoyant phase to last for some time.

Investors should be careful in investing in such markets and should typically take the advice of financial advisors or invest in diversified mutual funds through a systematic planning process in order to diversify their risk.