Are valuations still attractive or should investors wait and watch?

Manish Sonthalia, Senior vice-president and head, equity, Motilal Oswal

If you breakup the composition of the benchmark, nearly 60% of the index constituents are currently trading at extremely distressed valuations. That is how the valuation of the benchmark is in line with the 10-year average. However, I believe that the earnings growth rate of 15% that the market is factoring in is quite conservative and we anticipate the outlook to be much better than that. The earnings trajectory for the next five years will be much higher at 20%. By that measure, the market is currently trading at attractive valuations, unless you are a part of the camp that believes earnings growth will be just 10% in the coming years. You compute valuations relative to growth; relative to the growth opportunity, banks, IT, pharma and consumer stocks are undervalued at present. In other words, Indian equities continue to remain an attractive bet.

Satish Ramanathan, Independent market expert

Valuations are clearly high. Defensive stocks are all trading at multiples of 30-35 times, while technology stocks are quoting 22 times. The capital goods sector is also a bit stretched as most stocks have doubled. Considering that an economic recovery is yet to kick in, the bullish undertone does not make sense. Infrastructure spending is yet to take place and we are yet to see any tangible benefits of a decline in crude oil prices. India’s market cap being at 65% of its GDP is no indicator of valuations being cheap because there is no benchmark for the market cap-to-GDP ratio. As far as the Sensex is concerned, you have several companies that are expensive for reasons other than earnings growth. For example, the Street is betting on a delisting or a follow-on public offer with some companies. Against such a backdrop, the benchmark valuations hardly offer any comfort.