Why are Indian Equities So Overvalued?
National Stock Exchange, Mumbai, India
On the heels of India’s tax hikes on equity trading, aimed to hamper $2 trillion added to Indian market caps in just four years — the fastest ever — it is worth investigating why India’s stocks keep rallying so much. India’s indices are now worth over $5.5T, the 4th largest in the world, a point of pride and concern for policymakers.
Overall, Indian equities trade at a forward P/E ratio 80% higher than other EM equities, and 10% higher than U.S. equities, making them among the most expensive stocks in the world. Some specific industrial and consumer companies especially standout: Adani Enterprise boasts a staggering P/E ratio of 109.68, Tata Consumer Products has a P/E ratio 102.27, and Nestle India’s is 83.84 (as of COM July 23); these are more than triple and quadruple the multiples U.S. tech companies typically trade at.
Why?
Fundamentals are good, but not great:
Return on equity and realized growth rates have been skyrocketing with the last 5 years averaging 14%.
India, even in a high rate volatile environment, is projected for 6.8+% growth this year. This has boosted small and mid cap stocks considering the growing housing market and digital infrastructure boom.
Multinational companies like Hyundai and Cadbury are listing with high capital raises drawing in more speculation and demand.
However, the valuations of many companies grow despite falling revenue. 300 Indian companies had declining revenue for two consecutive financial years, yet 216 of their stock prices rose in the last 12 months, as per CNBC.
Retail Investors are bullish:
Kotak Institutional Equities has called Indian stocks highly overvalued and argues it is driven by the “extreme euphoria” of retail investors
Retail investors have been forking up more of their money into stocks, with 2% of households investing in 2011 to 17% in 2023.
Systematic Investment Plans (SIPs) have also become drivers of high valuations. In recent years, SIPs, which are programs that automatically take cash from an individual’s account and invest it into mutual funds, have become hugely popular.
This causes a steady inflow into mutual funds that are limited by their mandates on how much cash they can hold — as a result, major funds are forced to pour money into stocks with less attractive valuations
“[SIPs] have driven the upsurge in the Indian stock markets,” Jefferies’ head of India research, Mahesh Nandurkar, told CNBC.
In just May 2024, 5 million new SIPs were registered
