[T.S.R:15895] India: Do You See Any Perceptible Or Foreseeable Value? (Motilal Oswal)

India: Euphoric times Bulls seek divine intervention, Bears smell blood   Indian markets are in euphoric times. In September 2010, Nifty crossed the landmark 6,000 and Sensex breached 20,000, levels last seen 32 months ago in January 2008.   The Indian markets are valued at 16x FY12E earnings, at a premium to other emerging markets. YTD CY10, FII inflow stands at over US$19b, the highest ever so far. The euphoria is also spreading to the primary markets. CY10 is likely to end up as the year of highest domestic fund-raising in the primary markets. Technical indicators such as traded volumes and open interest are significantly higher compared to last market peak of January 2008.   Indian markets: valuations at premium to other emerging markets   Indian markets are up 16% YTD CY10. Almost the whole of this upmove came in 3QCY10 alone. Given no major upgrades to corporate earnings, this run-up implies sharp rise in market valuations. Currently, the Indian market is valued at 16x FY12E earnings, the highest among emerging markets. The valuation premium is high even after considering the fact that both earnings growth and RoE for India are among the highest.   Other pointers to market euphoria   In the run-up to 6,000 Nifty and 20,000 Sensex, technical indicators such as traded volumes and open interest are significantly higher compared to the last market peak of January 2008. While the average daily volumes have made a new peak in September 2010, it also marks a big rise MoM. Similarly, the average open interest in F&O are at a new high. The only difference in the F&O segment is a big drop in futures open interest as compared to the previous peak of January 2008.   Highest ever foreign flows driving up markets   The key factor driving up the euphoria in Indian markets has been inflows from FIIs (foreign institutional investors). YTD CY10, FII inflow stands at over US$19b, the highest ever so far. Even more interestingly, of the US$19b, US$12.6b (65%) of FII inflow came in the September quarter alone. In fact, this quarterly figure is higher than the annual inflows of past several years (barring CY07 and CY09). Further, more than half of the quarter's inflows were in the month of September alone ( also see box on next page).   Euphoria spreading to primary markets: biggest ever capital raising   With markets close to scaling their previous peaks, the euphoria is also spreading to the primary markets. CY10 is likely to end up as the year of highest domestic fund-raising in the form of IPOs/rights issues. YTD CY10, domestic issues at over Rs500b are close to the highest ever full year figure of Rs529b in CY07.   Given the pipeline of capital raising from both public and private sectors in 4QCY10, we expect CY10 total capital raising to significantly surpass the previous high of CY07.   Going forward, the issuance of fresh paper is likely to continue given the nearly US$10b disinvestment program of the government and huge equity raising by the private sector to fund growth capital (e.g. sectors such as Utilities, Real Estate, Infrastructure) or to deleverage (e.g. companies such as Tata Steel, Tata Motors).   Valuation: Seeking cheap sectors, re-rating possibilities   Sensex valuations in terms of P/E are at a 10% premium to the historical 10-year longterm average (LTA) at 15.8x FY12E EPS. In terms of P/BV, valuations are at a 15% premium at 2.9x FY12E BV, with RoE at 17.8% (lower than the LTA of 18.7%).   While the valuations are not excessive, we believe that the data points matter – more so in the event of market extremes. Some sectors like State-owned (PSU) Banks, Private Sector Banks, FMCG, Metals, Telecom trade at meaningful premiums to the long-term average.   Sectors like Auto, Cement, Engineering, Pharma, Utilities trade at similar levels to the long-term averages.   Our view   At the current levels of 20,000 Sensex and 6,000 Nifty, India is an interesting bottom-up market. Despite rich valuations overall, specific large cap stocks in high-growth sectors still hold the potential to deliver steady returns for the next 2-3 years.     Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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