FII Inflows Propel Key Indices; Soaring Valuations Pose Question Mark Over Sustainability As P/E Multiples at 40x; Drop In IIP, Sluggish GDP, Q3 Earnings May Slow Down Upward Trajectory; Nifty-50 Cos' Earnings & RoE One-Fifth Below Pre-Covid Level
Every cloud has a silver lining. It's true for retail and institutional investors as the Indian capital market offered a stupendous return of 91 per cent since the coronavirus-induced lockdown on March 23, 2020, till date against all odds in the domestic economy, of course global markets as well. So, it's better to park all your savings that you can afford to not to use in next five years, in Indian equities as the market pundits forecast a significant rally towards 1,00,000 points by 2025. It took 40 years for Sensex to reach 39,000 points in April 2019. But it just 20 months to add over 10,000 points as the BSE Sensex rose to the present record high of 49,517.11 points on January 12, 2021, from 39,000 level on April 1, 2019. And the journey towards 1,00,000 points will be much faster, observe market analysts. Going by the current pace, Sensex may touch 1,00,000 points in 2028, but the increasing pace with every 10,000 points level, the target is well in the horizon of 2025, predict the analysts.
The S&P BSE Sensex ended above 27,000 points for the first time on September 2, 2014, coinciding with 100 days of the Narendra Modi-led NDA government. The Indian market bellwether is closing in 50,000 mark during the second term of Modi sarkar. Will it be 1,00,000 points by 2025? Will it be the third term of Narendra Modi, who envisions $5-trillion Indian economy in next five years.
The broad-based index NSE Nifty recorded a record rally of 6,953.90 points, or 91 per cent growth, from 7,610 points on the day when lockdown began till the latest all-time high of 14,563.90 (intra-day high of 14,590.65) on January 12, 2021. The NSE Nifty was hovering at 14,553 points and BSE Sensex at 49,440 points on Wednesday (January 13). The question here is whether high valuations in the Indian capital market support the ongoing rally on the bourses?
The market analysts say that Nifty stocks' valuation reached all-time high of 40x as the index price-to-earnings (P/E) multiples reached record level when compared to the current share prices. With Nifty reaching all-time high, the index stocks touched a P/E multiple of 39.9 and earnings per share (EPS), which measures earnings per unit of the index, to Rs 364.6.
Last time, when PE multiple reached such high level was in 1992. The market bellwether BSE Sensex stocks' valuation peaked to P/E multiple of 57.4x in April 1992 during the times of the Harshad Mehta-led rally on the bourses. Later, the BSE Sensex traded at P/E multiple of 40x or higher in October 1994. Now, the BSE Sensex was hovering at a P/E multiple of around 35x, indicating second highest in last 25 years. For the first time in 25 years, NSE Nifty is trading at a P/E multiple of 40x or higher.
The Nifty dipped below the 8,000 mark on March 23, 2020, at the peak of the Covid-19 selloff. From there to 13,000 has barely taken 170 trading sessions, or eight months. The benchmark Nifty-50 hit the 8,000 mark for the first time in September 2014 and it took over six years (1,613 trading sessions) to scale the 13,000-mark, a gain of over 60 per cent.
Nifty gaining pace 10x faster than the previous 1,000-point rally. From 13,055 points on November 24, 2020, to the all-time high of 14,563.90 on January 12, 2021, it's less than 35 sessions for adding over 1,500 points.
Leaving everyone on Dalal Street clueless as the 1,000-point milestone was taking on an average of 28 trading sessions. Further, the rally was unstoppable during the devastating impact by the Covid-19 pandemic. So, what factors that helped the markets soar to new peak levels?
The aggressive stimulus measures announced globally by almost all the countries provided enough breathing space in the turbulent times of Covid-19. Further, the liquidity boost from global central banks helped the markets defy economic pain. The latest round of optimism was triggered by the two factors -- US election results and the approval to multiple vaccines. Analysts and economists forecast that the global economy will be back on its feet very soon. In case it doesn't happen, the NSE Nifty’s speedy upward trajectory may see many speed bumps.
The market analysts ruled out the comparision of valuations and market rally as the current market dynamics are totally different when compared to the market valuation in the early 1990s. The market capitalisation (mcap) was relatively very low in early 1990s where as now, it's soared to a whopping Rs196.56 lakh crore ($2.6 trillion) from Rs100 lakh cr on November 28, 2014, during the regime of NDA government.
India's mcap at $2.5trn
The market capitalisation (mcap) of Indian capital market reached to $2.5 trillion and it helped India maintain its market capitalisation ranking at number 8 this year also. India improved its position from number 10 in 2015 to present eight slot. The world mcap almost doubled in the past decade to $103 trillion. China, which was at number 5 in 2010, is now at number-2 with an mcap of $10.9 trillion.
According to a latest report from Motilal Oswal Financial Services, returns on Indian bourses were the third-highest among key global markets in local currency terms. The Indian capital market provided return of nine per cent. However, returns in the Indian capital market were more subdued with returns of just three per cent, in terms of US dollar, compared with 12 per cent for the S&P 500, eight per cent for Japan, and five per cent for Taiwan, stated the report. Indian markets, however, outperformed the MSCI EM (1%) and beat other emerging markets such as China, Russia, and Brazil, which gave negative returns.
Top performing sectors included technology (13%), consumer (12%), and health care (12%), and the sectors that suffered were metals (-4%), power (-4%), and realty (-1%). Top individual gainers in the Nifty-50 index were Bajaj Finance (54%), Eicher Motors (35%), and Bajaj Finserv (35%), while top losers include ONCG (-8%) and Coal India (-8%).
Top gainers in BSE 200 include Astral Polytech (53%) and Ajanta Pharma (50%), while top losers include KSK Energy (-41%) and Educomp Solutions (-39%), as per the Motilal Oswal Financial.
However, PSU share in the Indian market was at 10 per cent and this is a two decade low. The poor showing by PSUs in 2020 is attributed to a decline in the share price of industry heavyweights such as State Bank of India (SBI), Oil and Natural Gas Corporation (ONGC), NTPC, Indian Oil Corporation (IOC) and Coal India.
Further, the registrations of Foreign Portfolio Investors (FPIs) have been encouraging for the Indian markets as the FPI number surpassed 10,000 mark for first time as December month recorded over 100 registrations taking the total tally to 10,656, according to data from NSDL and Prime Database. India received record FPI inflows of $16.8 billion in November and December and this pushed the key indices to new highs, observe the market analysts. Buoyant market conditions encouraged the FPIs to focus on India and other emerging markets.
Generally, investors registered as foreign institutional investors (FIIs) and their sub-accounts under the older regulatory regime were deemed FPIs when the rules changed. Prior to Unlock, the number of FII registrations fell significantly after the outbreak of coronavirus and the looming market uncertainty.
India among emerging markets has turned out to be a favourite for FIIs and perhaps this is the reason why Indian benchmark indices rebounded sharply and gained a significant support from investors as well, added the analysts. Several emerging market-focused funds are lining up for FPI registration in India.
According to Sebi data, the average of new monthly registrations was over 100 until April 2020, and later it fell 31 and 36 in May and June. Subsequent months showed improvement but the number dipped again in October to 38. Analysts opine that key factors such as work from home, volatility in stock markets worldwide and redemption pressure compelled investors to defer investment plans. Consequently, the number of new FPI registrations witnessed a dip as well due to lockdown-like conditions and economic uncertainties globally.
The slowdown in new registrations in the past few months due to Covid-related challenges, lower FPI investment in debt, as well as higher allocation to P-notes (participatory notes). But, new FPI registration picked up in December and analysts predict that it would continue buoyancy in 2021 as well.
Participatory Notes allow investors to invest in Indian markets without registering as an FPI. The value of equity and debt holdings through the route was the highest since June 2018, shows the depository data.
The market regulator Securities and Exchange Board of India (Sebi) recently eased the registration process by allowing new FPIs to submit scanned copies of documents. In September 2020, Sebi extended the relaxation provided to FPIs and custodians for processing documents related to new investor registration if they belonged to jurisdictions still under a lockdown. Most custodians in Mumbai were working from home, hampering their ability to access documents.
According to the relaxation, custodians are allowed to process requests for registration, continuance, KYC review, and other material change on the basis of scanned versions of signed documents (instead of the originals) as well as copies of documents that are either not certified or have been received from email IDs of their global custodians’ existing clients.
India ranks 10th in Hurun's top-500
Another encouraging news for investors was that 11 Indian firms made it to the list of 500 most valuable companies across the world as listed out by Hurun. This puts India at 10th position on the chart. The total value of the 11 companies grew 14 per cent and has been pegged at $805 billion or nearly a third of the Indian GDP, according to Hurun Global 500 report. Of the 11 most valuable companies, seven have their headquarters in Mumbai followed by one each in Pune, Bengaluru, Kolkata and New Delhi, noted the Hurun's report. Consumer technology major Apple with a valuation of $2.1 trillion leads the Hurun Global- 500 list followed by Microsoft and Amazon at $1.6 trillion. All the 11 companies that made it to Hurun Global-500 list, are non-state enterprises that gained in value during 2020, which was hit by the pandemic, barring tobacco major ITC and second largest private sector lender ICICI Bank.
Mukesh Ambani-led Reliance Industries (RIL) leads the pack of the local enterprises with a 20.5 per cent jump in valuation to $168.8 billion as of December 1, 2020, and it's ranked at 54th globally, as per the Hurun list. Tata Consultancy Services (TCS) grew by nearly 30 per cent in 2020 and its value to $139 billion, ranking it 73rd globally and making it the second most valuable Indian firm.
The HDFC Bank's value grew 11.5 per cent to $107.5 billion. Hindustan Lever ($68.2 billion, gains of 3.3 per cent), Infosys ($66 billion and gains of 56.6 per cent), HDFC Ltd ($56.4 billion, gains of 2.1 per cent) and Kotak Mahindra Bank ($50.6 billion, 16.8 per cent in gains).
ICICI Bank's overall valuation decreased 0.5 per cent to $45.6 billion, taking it to the 316th spot in overall rankings, while ITC's value dived 22 per cent to $32.6 billion making it the 480th in the list of 500. The report further stated that 239 of the non-India headquartered companies have a presence in the country, with a maximum number of them having regional offices in the financial capital.
The Indian stock market rose 12 per cent despite the pandemic and this pushed the valuations upwards. The US accounted for nearly half of the enterprises with 242 of the 500 entries, followed by China at 51 and Japan at 30 companies. From a valuation gains perspective, China led with a 73 per cent increase by its top companies during the year, stated Hurun in its latest report.
The writer is a business journalist with 27 years of experience