According to data compiled by the ET Intelligence Group, the consolidated P/E ratio of benchmark Nifty is 15.2x, which is lower than the P/E ratio in the range of 25.4x-15.3x for Japan, Korea, Malaysia, Taiwan, Philippines, Indonesia and Thailand.
Though on a standalone basis, as per NSE's calculation, Nifty P/E is 19.49x, making it the fourth most expensive stock market in the world, experts believe taking into consideration the consolidated number, which is widely the practice for most global indices, the Indian markets are fairly valued at current levels.
"On a fundamental basis, valuations are at reasonable levels and upside seems limited," said Amar Ambani, head of research at IIFL. "However, given the abundant liquidity and decreasing risk aversion globally, it will not be surprising to see a further 8-10% upside to the markets." The Nifty P/E ratio is at 14x based on FY12 consolidated earnings and 13.4x based on FY13 estimates.
"Betting on India's long-term prospects, we are looking at a P/E of around 13x-14x. The current P/E is marginally above that level because of the slowdown in growth and the recent rally," said Sonam Udasi, head of research, IDBI Capital.
The P/E of an index is calculated by dividing the total market capitalisation of all the companies that constitute the index by the total net profit of the same set of companies. The ratio is usually calculated on a trailing 12 months net profit.
A calculation on a consolidated basis reflects the holistic business fundamentals of a company as it takes into consideration the earnings number of all its business and subsidiaries. On an average, the consolidated net profit for Nifty companies is 24% higher than the standalone number.
For instance, Tata Motors' trailing 12 months' standalone net profit for the period ending December 2011 was 1,250 crore compared with consolidated net profit, including JLR and other subsidiaries, at 9,999 crore. Similarly, the difference between standalone and consolidated net profits for Nifty majors Cairn India, Coal India, Sterlite Industries is 8,188 crore, 6,768 crore and 6,645 crore, respectively.
However, domestic equities are slightly more expensive than the other members of the BRIC congregation - Brazil, Russia and China.
"India's premium can be attributed to better RoEs (return on equity) at 23.6%, which is almost 500 bps more than other BRIC economies. India is also a more diversified market than Brazil or Russia that are predominantly commodity producers," said Vinay Khattar, head research - capital markets at Edelweiss Financial Services.
source ; http://economictimes.indiatimes.com
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