Jefferies says Indian stock market not too expensive as earnings growth catches up

Foreign brokerage Jefferies said the most obvious positive from the India stock market's standpoint is that the monetary tightening cycle is likely over, given the decline in inflation in recent months.  Jefferies said Nifty essentially traded sideways during the monetary tightening cycle, which allowed earnings growth to catch up with valuations. As a result, India is not as expensive as it was both in absolute terms and relative to the region (Asia), it said. 

"Investors have increasingly given up on the US recession forecast. But classic macro signals continue to suggest a coming US downturn. Still, monetary policy will work with an even greater lag than normal because of the role played by unregulated shadow banking in this credit cycle and the resulting lack of pre-emptive provisioning pressure from regulators," Jefferies said in its.

Jefferies said if the rising risks of recession in America and the Eurozone are the result of the still ongoing monetary tightening by both the Fed and the ECB, inflation remains structurally lower in Asia. This reflects Asian central banks’ orthodox monetary policy during the pandemic compared with the MMT-light policies implemented by G7 central banks. This should lead to a lower cost of capital for Asia going forward, Jefferies said.

Nifty's one-year forward PE stands at 18.7 times, which is above the 10-year average of 17.4 times, assuming 20 per cent earnings growth in FY24. It, however, is  well below the peak of 23 times in October 2021, Jefferies said. The Nifty PE premium to Asia ex-Japan at 46 per cent compares with the 10-year average of 38 per cent.

Jefferies said the ongoing inflow into domestic equity mutual funds, most of them via the Systematic Investment Plans (SIPs) deducted monthly from salaries, has been the key reason for the resilience of the stock market during the recent monetary tightening cycle. Net inflows into domestic equity mutual funds totalled $17 billion in the past 12 months to May, while monthly SIP contributions averaged Rs 13,360 crore over the past 12 months. Meanwhile, equities still accounted for only an estimated 4.7 per cent of household assets of $11.1 trillion as at the end of March, it noted.

"In terms of the drivers of economic growth, hopes continue to build for a capex cycle, while the residential property market has now entered the third year of an upturn. Housing volumes are expected by Jefferies India office to grow by an annualised 15 per cent over the next few years, given that they only grew by an annualised 2 per cent between 2010 and 2022. Meanwhile, property inventory  continues to come down and property prices continue to rise. Residential inventory for the top- 7 cities has declined from a peak of 45 months in October 2017 to an 11-year low of 18 months of sales in May," it said.

There is also accumulating evidence that India could be on the brink of a capex cycle, Jefferies said. It said the corporate debt-to-equity ratio for large listed companies is 0.6 times, the lowest level since FY06.

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