Pain for Indian stock market
Is the stock market close to peaking? This is the question one should be thinking about. The reason is that many of the companies are commanding crazy valuations – the kind normally associated with the peaking time of the bull market. Just look at the valuation at which Flipkart was bought by Walmart. Valued at $12 billion only last year, a 77 per cent stake in Flipkart is being bought by Walmart for $16 billion, which works out to a valuation of $21 billion. The US market, where Walmart is listed, did not give its thumbs up to the deal, because the stock price had taken a beating the day it was announced, which took off $10 billion from its $260 billion market cap. The big concern for Walmart’s investor is that it is paying too high a price for the stock it is buying.
It’s estimated that India’s e-commerce market is in the region of $25 billion. The price Walmart is paying for Flipkart suggests that it may have paid so much not only to scale up Indian operations, but also to block Amazon from becoming a larger player in India.
But the high valuation commanded by Flipkart is not an exception. There are enough examples available in the listed space too, where companies are commanding excessive valuations. The Avenue Supermarts (D’ Mart), which is commanding a P/E of 119 times based on trailing 12 months’ earnings. The company’s net profit is growing at handsome pace – 62 per cent last year. But can it sustain this kind of growth in coming years, with the base expanding? Also, the P/E ratio is arrived at after accounting for 62 per cent growth in earnings. Avenue Supermarts’ market cap is almost equal to the combined market cap of Colgate, Marico and Emami. There are several research analysts and fund managers, who justify the high valuation of Avenue Supermarts. Normally, this kind of justification is forthcoming only during a peak in the bull market.
Another listed player, Jubilant Foodworks, commands a P/E of 78 times, despite which many investors find it a good buy. This is notwithstanding the fact that the government is thinking of putting restrictions to discourage foods which are not perceived to be healthy.
Similar is the case with certain private sector banks and NBFCs. Bajaj Finance, which has filled the investors’ coffers substantially during the last few years, is an instance in point. In the process, the company’s price to book value too has gone up 10 times, making it one of the costliest NBFC shares in the world. Today, it’s commanding a market cap of Rs 1.23 lakh crore – higher than Yes Bank and IndusInd Bank. Put against other leading NBFCs, Bajaj Finance’s market cap measures equal to the combined market caps of M&M Finance, Edelweiss, L&T Finance and Shriram Transport Finance. It does give the feeling that the stock price is running ahead of fundamentals.
One may justify high valuations if macros are improving. But that’s not the case here. India is in the throes of a double crisis now – not only are the crude oil prices moving up, but the rupee too has started depreciating against the dollar. During the last three months, the crude oil price has moved up from $65 per barrel to $79 per barrel, while the rupee has declined from Rs65 to Rs68.50 to a dollar. The fiscal deficit is likely to touch four years’ high. The latest IIP numbers are at a four month low. Also, the 10 year India government bond has moved up from 6.67 per cent to 7.90 per cent in the last one year. And, the RBI is likely to push the interest rate up, impacting margins of India Inc.
Globally, the shadow of a federal rate hike looms large. FPIs too are not gung-ho about India’s equity market, as they have been constant sellers during the last few months. And, the domestic inflow, which was strong due to the retail investors’ fancy, seems to move in the slow lane now, as the investors have concerns about the recent volatility. The excess domestic liquidity that is driving the market up is likely to face headwinds in the coming months. With the election calendar heavy for the next 12 months, the market is likely to feel the heat.
While frontline stocks are at a decent level, giving a feel of the overall market, there is some erosion in midcaps and small caps. One of the star portfolio fund managers, who is known for his small and micro cap picks, admits that, in the recent past, his calls have gone haywire. Looking at the present scenario, it has all the ingredients to show that the market is peaking out. The only good sign this time is that, unlike in the past rallies, stock indices are not moving up too high or too fast – which means that the corrections would not be deep. But the pain is likely to be there; be ready for that!