Is Indian market costly or the opposite

After series of negative development over last two months, global news flow turned positive during last week.  This helped European stock markets clock more than 3% return for the week. Whereas Dow Jones Index was up by 1.74%, UK, Germany and French stock market were up by over 3%.

Among development in Euro zone-

Greece finance minster stating that they have sufficient cash to handle payout due in mid October. This gives EU leaders and institutions time to create framework for rescue till middle of December, when another round of large pay-out is due in Greece. Greece 10 year bond yield is still at over 24% and so thinking that Greece default will be saved is premature. But, we can expect an orderly re-structuring of Greece sovereign default issue with policy emphasis on arresting contagion.

Meanwhile in contrast to global developments, there were no positive developments as far as Indian macro is concerned. Food inflation remains high. Manufacturing PMI Index is now at two and half year low of 50.4. And on Friday news of another scam in terms of LNG prices by Petronet got surfaced. Interestingly, coinciding along with market decline over last one year- series of financial irregularity has come to light in India. In the short term these issues certainly hampers decision making and brings policy paralysis. But, if we take big picture, it will help clean system in the longer run.

In terms of market valuation, we trade at premium to other emerging markets like Korea, Brazil etc. and also at a premium to developed markets like US, UK, France. Our P/E is 14+, whereas that of US is 13.25, UK 11.7, Korea 12.19 and Brazil 10.27. And this premium suggests the structural strength of our economy and our market.

Some analyst wrongly cites this costliness of Indian market as reason for it not being attractive. But it is important to understand that absolute value of P/E ratio does not tell anything. It has to be seen in relation to underlying growth. And in that sense, on the basis of P/E to GDP growth, Indian market is among few of the most attractive markets of the world. Indian P/E to GDP growth ratio currently is 1.9, whereas that of US is 2.7, UK is 8.1 Brazil is 3.8 and South Korea is 3.7.

In terms of price movement, in absence of any short term trigger, Indian market will trade along with global indices.

In terms of stock, we recommend buying PRAJ industries around current price of Rs 71. Praj is expected to achieve sales and PAT growth of over 50% in Q2 results. It trades presently at one year forward P/E of 14. Its ROE is expected to go up from 10% to 14%, and looks good investment BUY from one year perspective.





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