India’s dividend yield is dismal at just 1.3 per cent, cautions CLSA

Concerns surrounding valuation is the most commonly cited reason for hesitating from greater portfolio allocation towards India, foreign brokerage CLSA said in a report.

Furthermore, India’s dividend yield of just 1.3 per cent is little more than a third offered by the pan-emerging market average and just above the lowest recorded relative level in over 27 years.

India underperformed APAC regional equities by 25 per cent from end-October 2022 to end-March 2023 before clawing half of the lost ground in 2Q23.

“We are now less concerned about half of the 10 reasons we cited for our 40 per cent underweight stance in our November 2022 report," the CLSA report said.

“Yet, we remain cautious for now given exceedingly rich valuations, margin erosion depleting India’s relative profitability, consensus EPS growth expectations remaining too optimistic (certainly versus the delivered track record), the RBI likely lagging EM central banks in the timing and scale of policy easing, and our econometric model signalling the market is 14 per cent overbought," CLSA said.

India’s non-financial sector net profit margin has compressed significantly since the November 2021 peak than for emerging markets overall, by 300 bps (9.5 per cent to 6.5 per cent) versus 140 bps (7.5 per cent to 6.1 per cent) for EM. This ongoing relative margin depletion has further driven down India’s relative return on equity to just 1.1x that of EM (ROE of 13.4 per cent versus 12.1 per cent) while investors have to pay a 2.2x book premium for Indian assets generating not much more profitability. “Again, we struggle to justify the down trend in India’s relative ROE in conjunction with the re-rating of the market’s price book in the absence of structurally superior growth and/or lower cost of equity," CLSA said.

The projected EPS growth remains too optimistic versus delivered, it added.

Since 1996 aggregate consensus sell-side earnings growth projections for India have disappointed 82 per cent of the time and on average over-promised by a factor of two versus what was actually delivered (20 per cent versus 10 per cent EPS growth in local currency terms).

Indeed, consensus has pencilled in a particularly aggressive successive expansion of market level (local currency) EPS for fiscal years 2023 through 2025 which we are understandably skeptical about, given the track-record since at least 2010.

At present, FY2025 (ending March 2026) EPS growth consensus forecasts are higher than the original estimate which, if maintained, would be the first year since at least 2010 that the actual posted higher than the first forecast, the report said.

While India retains valuation premiums on account of its established reputation as a “growth” market -- not entirely unwarranted given the 29-year Cagr in trend dollarised EPS at 6.4 per cent is similar to that of the US -- for the past 13 years India has been anything but, the report said.

The Cagr for India’s trend dollarised EPS since 2011 has been a paltry 0.3 per cent. Indeed, ranking the larger emerging markets on their delivered 10-year US dollar trend EPS Cagr places India in fourth place behind Taiwan, South Africa and Korea. The pattern of lower growth rates among emerging markets over the past 10 years versus 20-year duration may at least partially be explained by dollar strength.

Brazil, Mexico, and Indonesia, among other economies, appear better placed to deliver policy easing compared to the RBI.

CLSA said its India regression model signals that the market is 14 per cent overbought. MSCI India is currently 14 per cent higher than the level which prevailing macroeconomic conditions warrant given the two-decade relationship between the index (in US dollar terms) and four explanatory variables, which in combination have explained 80 per cent of the index’s monthly movements over the past couple of decades.

Moreover, 10 per cent potential model-based 12-month ahead US dollar upside for Indian equities is insufficient in comparison to other regional market model upsides to justify an overweight stance for Indian equities, the report said.