October 26, 2003
Is this boom for real?
Then: Is Sensex 5,500 in sight? Or even - who knows - 6,150, February 2000's alltime high? With India's key stock market index having blasted its way up these past five months, it's not a silly question any more. Why, the markets even shrugged off the world's dollar shudders in September, suggesting a strong case for an upturn based on unalloyed domestic logic.
When corporate chiefs mention the U-word these days, they mean 'U-turn' more than 'uncertainty'. Corporate performances, good so far, are likely to go up; and the Indian economy, having logged a reassuring 5.7 per cent in the first quarter of 2003-04, is likely to outpace 6 per cent for the entire financial year (6.5 per cent is what most projections say). The real story, however, lies in valuations. Look at it this way. The Sensex's rise from about 2,967 at the start of May to around 4,455 at the start of October may have been a dizzying experience. But the composite P-E ratio - the figure that's more indicative of 'value for money' - of the 30 Sensex stocks has risen only from 12.91 to 16.22 over the same period.
Two things stand out. One, the index's ascent has been accompanied by a steep increase in corporate earnings. And two, an index P-E in the mid-teens is still attractively modest - both by historical and global comparisons. In fact, 16.22 is still less than the index's P-E in January 1991, and less than half the 40s seen during the boom of 1994.
Now: The Indian stock market has since richly rewarded value investors. The Sensex P-E has been quoting at a premium to other emerging market indices. Analysts feel the India growth story justifies the premium.