News: 12K: Is the Indian market overvalued?
(FE 23/04/2006) Mumbai - The Sensex has touched the 12,000-mark in 15 trading sessions or 24 days. Investors are not in a mood to wait for a healthy correction or a fall as the market is not showing any signs of slowing down. FIIs, domestic mutual funds and retail investors are all betting high on the Indian growth story. They are overlooking the negative factors like interest rates and global crude oil prices that can pose a few threats in near future.
Considering the fact that the Sensex has surged 28% since January 2006, with most of the gains coming over the past month, the markets look overvalued now. “Retail investors need to be more vigilant now as FII inflow have reduced in April in comparison to the month of March,” says Deepak Jasani of HDFC Securities.
Valuations
The BSE Sensex is trading at a P/E of 21.4x for FY07F and 17.9x (excluding ONGC and Reliance) for FY08F against the earnings growth of 23% and 19% respectively. This makes the markets appear overvalued.
Moreover, the RBI clampdown on personal loans, high value home loans, venture capital financing and commercial real estate loans by raising the requirement of general provisioning on standard assets as well as risk weight is expected to increase interest rates in the future.
Other concerns include increasing global crude oil prices. It is expected that after the state elections, prices of oil products will rise in the country. On the FII front, the US Federal Reserve has hinted at a stoppage in its series of rate hikes. This could lead to funds moving back from the emerging markets like India to the US.
Results
Results for FY06 are out and so far, they are in line with market expectations as big IT boys - Infosys, TCS, Wipro, Satyam - have posted good numbers giving unprecedented height to the Sensex. Top IT companies saw sales move up by 33% and net profits by 36% over the last year. The sector is poised for growth as global software vendor demand is expected to grow by 8% for the next few years. “Indian companies can grow at the present growth rate of 30% for another two-three years. But margins might be affected,” says an analyst from a leading broking firm.
Many companies have signed multi-year multimillion dollar deals and it is estimated that over Rs 81,000 crore of more such deals are coming up for negotiations. Infosys, Tata and Wipro together plan to hire about 85,000 software engineers in the next financial year and upgrade software operations by a huge 50%.
There is no news of bad results as yet. But it may prove to be a litmus test for the benchmark index.
Strategy
Presently, it’s good to play safe and defensive in the market as most of the stocks have run-up to their value. Auto stocks like Maruti Udyog and Tata Motors have already discounted on the positive news of cut in excise duties and ban on overloading of trucks. Moreover, a possible hike in oil prices may further put the pressure on the auto industry.
Pharmaceutical industry is a new growth story. Intensifying generic competition and major patent challenge losses for the pharmaceutical industry marked the current financial year. Unlike the last financial year, FY06 is expected to end on a healthier note. For the nine months ended December 2005, net sales of 50 large pharma companies went up by 23.1%, while their net profit moved up 38%. MNC companies like Aventis and GSK Pharma are expected to perform better this year on account of focus on strategic products coupled with new launches.
Analysts feel that ONGC is another promising stock. For the third quarter, operating profit margins for ONGC have improved considerably by 14 basis points to touch 63%.
However, a higher subsidy share in terms of discounts on crude oil and natural gas to oil marketing companies resulted in a relatively subdued bottomline growth.
The company is expected to improve its margins further as ONGC Videsh Ltd (OVL) has emerged as the key growth driver for ONGC. It has also acquired eight E&P blocks over the last 10 months and some of the E&P acquisitions over the last few years (Sakhalin, Sudan 5A and Syria) are set to commence production. Expected increase in oil prices will also bring good news to oil marketing companies like HPCL.
The market is generally giving the feelers that stocks are getting overvalued. Though the economy is on a growth track, market experts are advising that investors need to be sector-specific and more importantly stock-specific and stick to index or index-related stocks.
Considering the fact that the Sensex has surged 28% since January 2006, with most of the gains coming over the past month, the markets look overvalued now. “Retail investors need to be more vigilant now as FII inflow have reduced in April in comparison to the month of March,” says Deepak Jasani of HDFC Securities.
Valuations
The BSE Sensex is trading at a P/E of 21.4x for FY07F and 17.9x (excluding ONGC and Reliance) for FY08F against the earnings growth of 23% and 19% respectively. This makes the markets appear overvalued.
Moreover, the RBI clampdown on personal loans, high value home loans, venture capital financing and commercial real estate loans by raising the requirement of general provisioning on standard assets as well as risk weight is expected to increase interest rates in the future.
Other concerns include increasing global crude oil prices. It is expected that after the state elections, prices of oil products will rise in the country. On the FII front, the US Federal Reserve has hinted at a stoppage in its series of rate hikes. This could lead to funds moving back from the emerging markets like India to the US.
Results
Results for FY06 are out and so far, they are in line with market expectations as big IT boys - Infosys, TCS, Wipro, Satyam - have posted good numbers giving unprecedented height to the Sensex. Top IT companies saw sales move up by 33% and net profits by 36% over the last year. The sector is poised for growth as global software vendor demand is expected to grow by 8% for the next few years. “Indian companies can grow at the present growth rate of 30% for another two-three years. But margins might be affected,” says an analyst from a leading broking firm.
Many companies have signed multi-year multimillion dollar deals and it is estimated that over Rs 81,000 crore of more such deals are coming up for negotiations. Infosys, Tata and Wipro together plan to hire about 85,000 software engineers in the next financial year and upgrade software operations by a huge 50%.
There is no news of bad results as yet. But it may prove to be a litmus test for the benchmark index.
Strategy
Presently, it’s good to play safe and defensive in the market as most of the stocks have run-up to their value. Auto stocks like Maruti Udyog and Tata Motors have already discounted on the positive news of cut in excise duties and ban on overloading of trucks. Moreover, a possible hike in oil prices may further put the pressure on the auto industry.
Pharmaceutical industry is a new growth story. Intensifying generic competition and major patent challenge losses for the pharmaceutical industry marked the current financial year. Unlike the last financial year, FY06 is expected to end on a healthier note. For the nine months ended December 2005, net sales of 50 large pharma companies went up by 23.1%, while their net profit moved up 38%. MNC companies like Aventis and GSK Pharma are expected to perform better this year on account of focus on strategic products coupled with new launches.
Analysts feel that ONGC is another promising stock. For the third quarter, operating profit margins for ONGC have improved considerably by 14 basis points to touch 63%.
However, a higher subsidy share in terms of discounts on crude oil and natural gas to oil marketing companies resulted in a relatively subdued bottomline growth.
The company is expected to improve its margins further as ONGC Videsh Ltd (OVL) has emerged as the key growth driver for ONGC. It has also acquired eight E&P blocks over the last 10 months and some of the E&P acquisitions over the last few years (Sakhalin, Sudan 5A and Syria) are set to commence production. Expected increase in oil prices will also bring good news to oil marketing companies like HPCL.
The market is generally giving the feelers that stocks are getting overvalued. Though the economy is on a growth track, market experts are advising that investors need to be sector-specific and more importantly stock-specific and stick to index or index-related stocks.
posted by InCar Group Press Room at 21:53
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