Mar 2014: Markets at new high, but still reasonably priced

The 6 year old bear market in India showed the first signs of changing gears, with the Nifty trading at all time high levels, nearly 7% above the peak levels reached in Jan 2008. Markets were strong during the month, and the financial year ending Mar 31, 2014 also witnessed a strong closing, with the Nifty up 18% for the year. This has been the best performance for the Nifty in the last 4 years.

Since the bear market began in Jan 2008, equity as an asset class has been shunned by investors in India, in favour of debt, real estate and gold. During this period, it is the foreign investor who seems to have looked at Indian equities far more favourably than domestic investors. Over the last 6 years, domestic investors’ inflows into equities have been close to zero or negative, as indicated by net outflows from Mutual Funds and other Equity linked plans. Mind you, domestic investors do have substantial savings. Total incremental bank savings this year will be close to $ 180 billion, compared with an annual investment by FII’s at about $ 25 bn. Domestic investors have sufficient savings, but have just not gained comfort with equities during the bear market. The preference has been much rather to invest in debt, where returns on a post-tax basis, trails inflation. History suggests a bullish period would change this mind set. Investors tend to chase recent performance and the slowdown in appreciation in real estate and gold and the concomitant recent uptick in equities will likely push domestic investors to invest incrementally into equity.

With markets hitting highs, we have been asked the question as to whether it is a good time to invest in equities. It is our belief that the future direction of the equity market is dependent on 2 factors – growth and valuation.

An analysis of the Top 10 holdings in our portfolio (we would like to believe it is a biased sample) shows a median revenue growth of 18.3 % pa over the past 6 years. Profit growth is slower at 14.3% pa, though still very healthy. Growth continues to be strong for several companies in India. The strong demographic profile indicates the coming years should continue to be favourable for the right companies. On the profitability front, returns on invested equity of the Nifty are close to the low levels seen over the last 20 years and have scope for expansion from current levels. From a valuation perspective, the Nifty currently trades at close to 16.5x its FY2015 earnings, which is near the low end of its historical trading multiples.

The outlook for equities continues to be good, both from the perspective of growth and valuation. The coming years look very interesting for most of our portfolio companies and we believe they are well positioned to capitalize on the growth opportunities that the economy will throw up, as the economy gets back on track.