Valuations worry? Play earnings revival theme before bottomlines begin to swell

NEW DELHI: The recent rise in PE valuations of the benchmark equity indices has left Dalal Street investors with many doubts. While some foresee a correction ahead, others see a sustainable rally in Nifty50 beyond the 9,000 level.

Amid the hot debate, some experts believe growth, and not liquidity, would drive the domestic market going forward.

At present, the MSCI India index trades at 17.7 times forward earnings, which is 0.9 standard deviation above its 10-year average.

“Valuations are not cheap even for Indonesia, Thailand or other markets in Asia. There are two clear themes investors are going for. One is yield and that is the reason you have seen the Taiwan market drawing the highest inflows in Asia so far this year. The second is growth and markets like Indonesia, the Philippines and India fall in this category,” Devendra Joshi of HSBC told ET Now.

Sunil Singhania of Reliance Mutual Fund pointed out that global investors were shorting bonds across the world and capital was much cheaper today than it was in the past.

“The weighted average cost of capital (WACC) globally has come down meaningfully even in India and it is coming down. Maybe the new normal would be a 17, 18, 19 PE rather than the 15 PE, which we are used to. So there is a lot of liquidity. Just because the market is 5-7 per cent higher than the 10-year average, one should not turn a seller,” Singhania told ET Now.

Earnings might surprise, Singhania said, adding : “Because of the lower cost of capital, valuations and DCF can go up significantly in an era when the country can transform meaningfully from what it has been over the past so many years.”

Earnings growth expectations have come down to around 13-14 per cent from around 17-18 per cent at the beginning of this year.

Expectations are likely to get lowered by 100 to 200 basis points after the ongoing earnings season gets over.

But that is what pretty much everyone knows, Joshi said.

“If you look at the breakup, basically there are surer indicators of growth that we could see in consumption right now. Government capex is doing its bit to support the whole investment cycle, but it is not the larger part of the whole investment pie in India,” he said.

Data from ET Intelligence Group showed some 409 companies have reported a 7.7 per cent YoY growth in June quarter profit at Rs 50,563 crore on a 2.5 per cent YoY sales growth at Rs 3,79,559 crore during the same period.

According to S Naren, ED & CIO, ICICI Prudential Mutual Fund, the time to invest is when earnings growth are still low like they are at present.

Naren said over the next two years, one will have a good economic cycle leading to much better earnings. “People are trying to time the earnings cycle. I do not think you should do that. You should invest for the medium term today,” he said.