Indian stocks: Most expensive amongst BRICs?

Mon, 24 Mar Pre-Open

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'The Buffett Indicator' (TBI) is one broad valuation parameter that is being spoken about a lot off late. Why? Because of the way the stock prices have been moving in the US.

TBI is calculated by dividing the total market capitalisation of country by its GDP. As such it would be a broad based price to sales ratio.

In the US, it currently stands at about 1.4x. At the end of 2007 and 2010, the same stood at about 1.26x and 1.07x respectively. As compared to these two earlier points, the current valuations do seem to be on the higher side. However, critics of this multiple are of the view that since stocks in the US have been trading above the 1x mark for a while now (over a decade), it does not necessarily indicate that markets are currently expensive; and as such, they disapprove of this indicator. They also argue that a big chunk of the American companies' business comes from outside of the US and therefore this is not a good indicator.

When discussing the same about India, however, the story is very different. As reported by the Economic Times recently, Indian stocks have been the second best performers in the world - in terms of recovering from their 2008/09 lows. The current market cap of the Bombay Stock Exchange (BSE) is now at similar levels to what it was at the end of December 2007. But, over this six plus year period, the country's GDP has grown at a steady pace, rising from US$ 950 bn to US$ 1.8 trillion.

In other words, the total market capitalization has not kept pace with the GDP growth. At the end of 2007, TBI valuation stood at a high figure of 1.46x. At the end of 2010 it fell to 0.96x. Currently it is close to 0.6x. As such, this parameter indicates that Indian stocks are not expensive.

But, it would only make sense to compare this parameter to those of India's peers. In China, Brazil and Russia, the current market cap to GDP stands at 0.45x, 0.39x and 0.4x respectively; indicating that India is relatively more expensive when compared to its peers. But when compared to the world's average of 0.87x, Indian stocks seem attractive.

As you would be aware, the broader valuations of the key indices are nowhere close to their peak levels. At the end of 2007, the BSE-Sensex was trading at a price to earnings multiple of about 28x its trailing twelve month earnings. Today's valuations are closer to its long term average of about 18x. When looking at the index's price to book value parameter, the Sensex seems much cheaper than before. Currently, it stands at about 2.6x as compared to the end-2007 level of 6.7x.

Stocks from selected sectors such as healthcare, FMCG and information technology have led the broader market gains over the past few years. What will provide the fillip to valuations would be the performance of the relatively underperforming sectors such as engineering, steel and infrastructure; the revival of these businesses in turn would depend on the overall macro environment, which is why all eyes are on the upcoming elections and its expected impact on business environment thereafter.