- We turned negative on Indian equities and downgraded its Star Rating back in October 2022. One of the key reasons anchoring this downgrade was the region’s lofty valuations which reduced the upside potential and raised the risk of de-rating.
- Since our update, valuations have declined slightly but the Sensex Index is still trading at a 20% premium to the long-term average. Indian equities also remain pricey relative to Asian equities, despite the recent rally in north Asian and ASEAN equities.
- If a global recession were to materialise this year (our base case), Indian equities will be entering it with historically high valuations, akin to levels seen during the global financial crisis and the pandemic. We see a high risk of a significant valuation compression in a recession.
- While near-term risks are present, India’s growth potential remains firmly intact and is one key reason why we are keeping Indian equities on our radar. Powerful and synergistic domestic tailwinds, as well as positive reforms, buttress India’s long-term growth potential.
- We maintain our cautious view as upside potential remains muted due to steep valuations. While we acknowledge India’s growth potential, we are hesitant to pay an extended premium at this point. That said, we are keeping Indian equities on our watch list and await a better point of entry.
Lofty valuations were one of the key reasons we turned negative on Indian equities
Have valuations come down after the recent market rout?
Chart 1: Relative valuation has declined – Indian equities have become cheaper relative to Asia ex-Japan equities
Chart 2: India is the most expensive equity market in Asia
Indian equities might enter recession with historically high valuations. Bad news always follow
Chart 3: Indian equities will be entering a recession with historically high valuations, akin to levels seen during the GFC and pandemic
Chart 4: Same observation across other major Indian equity indices
Expect further earnings downgrades
Chart 5: Indian equities tend to experience EPS downgrades across the fiscal year
Secular opportunities abound and unhindered
Waiting for a better entry point
Chart 6: Earnings forecast and price performance of the Sensex Index
Table 1: Projected upside for Indian equities
|
India (Sensex Index) |
FY2022 |
FY2023 |
FY2024 |
FY2025 |
|
PE ratio (X) |
22.0 |
22.8 |
21.1 |
17.8 |
|
Projected earnings growth (YoY %) |
29.3% |
20.1% |
7.8% |
18.5% |
|
Projected Earnings Per Share (EPS) |
2,250 |
2,703 |
2,914 |
3,452 |
|
Target price (Based on 19.0X Fair PE ratio) |
- |
- |
- |
67,000 |
|
Potential upside (%) |
- |
- |
- |
8.9% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 16 Feb 2023. *Fiscal year 1st April to 31st March. |
||||
Table 2: Recommended Products
|
Unit Trust |
ETF |
|
|
India |
The Research Team is part of iFAST Financial Pte Ltd.
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