NEW DELHI, 17 October 2005 — A five-month rally to record highs has made Indian shares expensive, and investors scent a downturn as equity funds appear hesitant to invest more.
Company profits are still growing strongly, and the 30-share BSE index hit a record last week. By the close of trading on Oct. 13, it stood 27 percent up on the year so far, 5 percent short of its peak.
But at about 16 times the expected earnings of its constituent companies for the coming year, the index is pricier than Singapore’s Straits Times at 15, Australia’s S&P/ASX 200 at 14, and London’s FTSE 100 at 13, although it is cheaper than Tokyo’s Nikkei 225 at 20, according to Reuters data.
“Many leading stocks are quoting at prices that are ahead of valuations,” said Vinod Bansal, director at V.N. Capital.
“The market needs a bit of a correction from these levels and stock prices will now take cue from second quarter results.”
Shares in Hindustan Lever Ltd., India’s top personal care products maker, trade at a forward price earnings multiple of around 31 times 2005 projected earnings, compared with a world industry average of 20 for large personal care firms.
UltraTech Cement Company Ltd. has a forward PE of about 29, against an average of 20 among large building products companies around the world.
But Satish Kumar, analyst at BRICS Securities, said UltraTech’s higher multiple indicated strong growth prospects for the company, plus cost savings resulting from its move to replace high cost naphtha fuel with lignite.
Key Indian software firms also appear highly valued relative to overseas rivals. Tata Consultancy Services Ltd., Infosys Technologies Ltd. and Wipro Ltd. trade at 23-29 times forward earnings, compared with about 17 for both Accenture and IBM, according to Reuters data.
In September, 257 equity schemes mapped by fund tracking firm Value Research gave average returns of between a loss of 0.6 percent and a gain of 9.3 percent. During that month, the benchmark index climbed 10.6 percent.
“Easy money has already been made. Now it is increasingly getting tougher for funds to post such high returns,” said Dhirendra Kumar, managing director at New Delhi-based Value Research, said.
Sector funds posted returns that were lower than their respective indices last month. This suggested that money managers were either sitting on cash, or had added medium and small companies that do not form part of an index to their portfolio, Kumar said.
At the end of September, equity funds had some 95 billion rupees ($2.1 billion) in cash, up from 53 billion at the end of August, he added.
Data from Value Research showed funds in the banking sector gave average returns of 8.4 percent, well below the 14.7 percent surge in the sector benchmark.
Diversified funds, the largest segment, rose on average by 5.4 percent against a 6.9 percent rise in the 500-share S&P CNX 500.
Personal care and automobile sector funds saw their average NAVs rise 4.9 percent, behind their benchmarks that climbed 12.5 percent and 11.9 percent respectively.
Returns on tax saver schemes were 4.1 percent on average, while funds in the technology sector earned 2.7 percent on average against the 4.5 percent gain on its benchmark.
Investors in pharmaceutical schemes were losers, with the average returns showing a negative 0.6 percent, compared with a 2 percent gain on the sector index.
There are also worries that foreign funds, who hold considerable sway on domestic sentiment, are going slow.
Overseas investors have been net sellers of about $128 million worth of shares in October, lowering their total investment in 2005 to below $8.4 billion, according to data from the markets regulator.
Despite concerns share prices are getting pricey, the latest earnings evidence suggests Indian corporate health is as robust as ever. Infosys, India’s number two software services exporter, last week reported better-than-expected second quarter earnings and revised its full year guidance upwards. Larger rival Tata Consultancy Services Ltd. also beat analysts’ expectations with a 20.5 percent profit rise.
India’s economy grew an annual 8.1 percent in the fiscal first-quarter to June, the fastest pace in more than a year.
“Economic growth momentum will remain strong in the coming years and earnings will ultimately follow,” Prabhat Awasthi, head of research at BRICS Securities. He sees annual earnings growth of 17-18 percent for some 60-odd leading companies in his tracking universe, excluding the oil and gas sector. Other analysts see that earnings growth slowing to 13 percent in the year to March 2007.