India's surging share valuations enter a demanding zone
BSE Sensex was valued 24.8 times the earnings of its 30 constituents. This average monthly price-to-earnings (PE) ratio of the Sensex has been higher than this only about 20% of the time since 1990. While it has delivered gains even at higher valuations, some of the corrections have been brutal—the Harshad Mehta securities scam in 1992, the dotcom crash in 2000, and the US financial contagion in 2008.
Unlike those phases, this Indian market is not a dire one. But it’s pulling away from both its own long-term averages and from other markets, raising levels of downside risk. Among 45 markets tracked by World PE Ratio, a financial information website, India is the third-most richly valued, after Nigeria and New Zealand, both minor markets.
Of these 45 markets, 16 trade above their 20-year PE average, led by New Zealand, India, Taiwan, and the US. The 20-year PE average of the Sensex is 16.8. In other words, it is currently about 40% above its 20-year average.
The PE ratio is relative, reducing with earnings growth. Theoretically, a 25% growth in earnings of the 30 Sensex companies will pare this ratio from 24.8 to 19.8, where it starts to look more reasonable. A 15% growth in earnings will lower it to 21.6.
The Sensex is less of a concern, as it comprises the finest of India Inc, and their long-term prospects remain good. Of greater concern are indices that represent the lower reaches of the stock market. Some have run up significantly more than the Sensex in 2023, and their constituents are less known, some even might be flavours of the season.
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