Equity valuations now elevated across metrics

Trading At Premium

• Several sectors trading at 2-3x multiples

• Banks and PSEs are exceptions

• Expanded bond-earnings yield gap indicates muted returns

• Recovery has not been broad-based

• Mass-consumption categories still under pressure

New Delhi: Most sectors in India are currently trading at a premium to their respective last-decade averages (in terms of NTM P/E multiples), BNP Paribas said in a report on Indian equities. Exceptions are banks and sectors dominated by public-sector enterprises. Several sectors are also trading at 2-3x the multiples prevailing a decade back. This has reduced the margin of safety, in our view, the report said.

While in some cases, valuation multiples are at a small premium to the 5-year and 10-year averages, the 5-year averages factor in a period of low interest rates and high optical P/E ratios due to the pandemic. The high P/E ratios over the last 5 years have also lifted the last-decade average, and their premium over the absolute multiples prevailing a decade ago, when the current government came in power, are significantly higher than what their premium over average multiple indicates.

“Valuations are now elevated across metrics. In particular, the expanded bond-earnings yield gap indicates muted returns from here as historically this has been a reliable leading indicator. The other concern is that the recovery has not been broad-based, with mass-consumption categories still under pressure. A renewed interest in China and an increase in LTCG tax on equities as the government looks to mobilise resources to drive mass consumption are also potential risks,” the report said.