It seems that an asteroid of overvaluations is about to hit the Indian stock markets.
For quite sometime now, brokerages and analysts have been ramming home the key point that over-exuberance, aka, greed is driving up Indian equities. All traditional metrics such as the price-earnings ratio and revenue and profitability indicate that prices are blinking red and may snap at the slightest touch.
Regardless, investors appear to be dismissing expert predictions as random guesses and their trades are full of enthusiasm and lacking caution. How else would one explain the recent madness behind a Delhi-based bike dealer's Initial Public Offering (IPO) that was over-subscribed nearly 400 times. All the company wanted was to raise a modest Rs 12 crore, but instead it received bids worth a mind-numbing Rs 4,800 crore.
There are several quantitative and qualitative ways of determining whether markets are overvalued, undervalued or fairly valued. There's another relatively easier, but non-scholarly measure, which is to look out for overly bullish retail investors. Back in the day, it was time to exit if you start getting stock tips from your office boy, vegetable vendor or the lift man. Now, just take one look at the equity cult on social media and you have your answer.
Sensing the need, brokerage Kotak Institutional Equities has been repeatedly warning about market exuberance. If in May, it boldly announced that it finds little value in the Indian market, and that most sectors and stocks were overvalued, in July it reiterated that valuations were high in the case of several low-quality companies, as well as most large-cap consumption stocks. For instance, stocks such as Bajaj Auto, TVS Motors, Asian Paints, Havells India, Nestle India, and Varun Beverages were trading at 30-86 times their earnings per share.
Without mincing words, it concluded that greed was the mother of all evils and termed the Indian market as a mix of "rightful optimism and mistaken euphoria. While some sectors reflect the strength and long-term growth of the Indian economy, others show 'extreme euphoria based on unfounded narratives'," it noted.
Likewise, the Buffett Indicator, which measures the overall valuation of the stock market relative to the country's GDP, too is flashing red. Recent data shows that India's Buffett indicator value crossed way past its historical average of 0.83 and is hovering above 1.4, indicating that the market is significantly overvalued.
In fact, the Economic Survey 2023-24 too cautioned about overconfidence and speculation as a concern, stating that the outlook for India's financial sector appears bright, though some areas need focused attention. "The market capitalisation to GDP ratio is not necessarily a sign of economic advancement or sophistication... Financial assets are claims on real goods and services. If equity market claims on the real economy are excessively high, it is a harbinger of market instability rather than market resilience," it observed.
Market capitalization is the total combined value of all publicly traded companies listed on the Indian stock exchanges and is derived by multiplying the current market price of a company's shares with the total number of outstanding shares. It gives an indication of the overall size and value and is a key metric used by investors, analysts, and policymakers to assess the health and performance of a country's stock market and economy. A higher market cap suggests a larger and more significant market, reflecting the collective value of companies traded on the exchanges.
Interestingly, the rise in India's market cap mirrors a trend in personal finance. As with personal wealth, which takes the longest time to reach the first billion, while the subsequent billions are added in shorter periods, India's market cap is growing swiftly.
First, it took 46 months to add $1 trillion, when between July, 2017 and May, 2021 India's market cap rose from $2 trillion to $3 trillion. Next, it took 30 months to add another trillion to $4 trillion by December, 2023. And according to NSE, it took just six months to leap from $4 trillion to $5 trillion, by May, 2024. In the last three months, it added another half-a-trillion taking India's market cap to a neat $5.5 trillion as on August 30.
With a market capitalisation of $5.5 trillion, India is currently ranked fourth globally. The three other markets ahead of us include the US stock market, which is significantly larger at over $54 trillion, followed by China ($10 trillion), and Japan ($6.2 trillion). India is expected to emerge as the third-largest economy by 2027, and according to various estimates, the market cap will likely hit $10 trillion by 2030.
If brokerages and financial institutions like Jefferies and the Pantomath Group project $10 trillion market cap, citing strong economic growth, favorable demographics, and a rising domestic investor base, other conservative investors and analysts peg it at $8 trillion by 2030.
Besides robust growth, rising foreign investment, strong corporate performance and stock market reforms, the other significant influencing factor is retail investor participation. Between 2019 and 2023 alone, about 120 million new retail investors entered the stock market. And as disposable incomes rise, more will invest in the coming years.
In fact, the enthusiastic participation of retail investors, besides of course the strong flows from institutional investors and secondary markets is pumping up the IPO market too. In FY24, 76 companies together raised Rs 62,000 crore, a 19% increase over the previous year and expectations are high for yet another stellar year this fiscal too.
Currently, there are only 5,500-odd active listed companies, out of the 16 lakh registered corporates. India Inc must broad-base the capital formation coverage and reach out to rural enterprises, including rural areas. Analysts also believe that companies must issue new shares to increase the publicly available pool of shares, as about 50% of the shares are promoter-owned, leading to a lower public float.
Following the time-wise correction in March 2023, the Indian equity market witnessed a phenomenal performance in FY24 with benchmark indices Nifty and Sensex touching unprecedented all-time highs of 22,526 and 74,245 respectively. The current fiscal has just begun, but has already scored milestones with Nifty touching 25,000, while Sensex scaled the 82,000-mark. That said, stock market swings are often wild and can go from comedy to tragedy before you know it.
Which is why, analysts are cautioning repeatedly. Investor Deepak Shenoy, who has warned about the risks and the likely fall when the crash comes down, summed it aptly: "It's time to be aware that you're all riding a tiger," he wrote on X. Terming it a mad market, he said the conditions will remain so until they don't. "There is zero predicting ability on stock movements right now. It's a mad market and will remain one until...it's not. The point isn't to keep warning people that it's getting too hot. I've heard this from last December and we're up some 30% or more since. It could fall tomorrow, or it could fall 10 months from now. The better thing to warn people is to stay nimble and stop loving your stocks. When markets fall, even the ones that give you the most smiles today might need a harsh goodbye."
