Can India justify its valuations?

Tue, 10 Aug Pre-Open

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Stockbrokers in the UAE are gradually becoming an extinct lot. In 2006, brokerages had a gala time as share prices surged on the back of declining borrowing costs and rising oil prices. But then the global crisis erupted and rising optimism in this Gulf nation came to a grinding halt. The debt problems in Dubai escalated. Dubai is now mired in debt of more than US$ 100 bn most of which was poured into construction.

As real estate prices plunged, so did construction activities. Not surprisingly, the shockwaves have been felt in the financial markets of UAE as well. Infact, stock brokers there are struggling to make ends meet as trading volumes have tumbled to the lowest in four years. The average daily volume of shares traded in Dubai has slumped to 173 m so far this year from 477 m in the year-earlier period. And so many of them are being forced to close.

India, thankfully, is not likely to suffer the same kind of fate as its Middle Eastern counterparts. Trading volumes have been very buoyant and markets have made a spectacular recovery since the lows of 2008. But it could face problems of another kind. The country has recovered well from the crisis and has been growing at a strong pace. This has given a lot is impetus to stockmarkets which have surged since March 2009 although the pace in recent times has been tempered somewhat. Not just that, with US still struggling to recover and Europe being mired in debt problems, foreign investors are looking for attractive investment destinations. In this regard, India more than fits the bill. Not only is the current growth strong but there is scope to take this growth up one notch. Provided the government genuinely makes efforts to ramp up infrastructure. Thus, the growth story in India is very much prevalent.

But are the current valuations justified?

Most stocks are already looking fairly priced meaning that the positives of the 'India story' have already been factored in. Interestingly, as long as growth remains subdued in the US and Europe, stock prices scaling higher despite fair valuations cannot be ruled out. But the country will really have to grow 9% plus on a sustainable basis going forward if its wants to command these kind of valuations in the future as well. India has the necessary ingredients to scale up its performance. But the government will need considerable willpower and willingness to implement the same.