Indian equity markets tread into undervalued zone

Indian equity market has turned from being significantly over-valued about two months ago to under-valued as India witnessed its fastest run into the bear market territory.

Buffet indicator, which measures the investors’ wealth as a proportion of gross annual national income, shows that India has slid below 75% mark for the fairly valued security market and is in the bear zone.

As of date, the indicator, which is prominently used by the global investors to check the valuations of the equity markets, shows that India’s investor wealth to national income ratio stands at 74%, compared with 115.2% two months ago when the market capitalistion of India Inc had peaked owing to a constant rally in the stocks. If Buffet Indicator goes above 115%, the country’s stock market is considered as significantly overvalued.

In fact, in the past three years, Indian markets, which are driven mostly by a select group of blue-chip companies on the benchmark indices, had surged despite corporate earnings being muted. As a result of this, by December 2019, the investors were paying over Rs 27 for every Re 1 earning of the India Inc.

However, despite this correction, the analysts on Dalal Street are asking their clients to avoid accumulating the scrips of companies, other than select few companies on BSE Sensex, as earnings are likely to be hit by over 15% in the coming quarters owing to lockdown in the major cities.

Bank shares in peril

Contrary to the perception that COVID-19 was causing a big blow for the Indian stock market, the data available with the exchanges reveals that the concerns over the banking sector stability are also weighing heavy on the Banks -- especially the private lenders.

Nifty Private Bank Index has collapsed by 43% to 9,050.50 points from 15,853 points since March 5 after the fall of YES Bank.

The index is now trading at a level half (down 51%) of its 52-week high of 17,914 points.

In fact, stocks of all the five largest private sector banks have been among the biggest wealth destroyers in the Indian markets -- with some shredding more than three fourth of their annual highs.

Private lendor IndusInd Bank is down 83% from the 52-week high, Axis Bank by 63%, ICICI Bank by 46%, and HDFC Bank by 41%. On the other hand, Kotak Mahindra Bank has performed better among the banking stocks, crashing by only 34% from the 52-week high.

The banking stocks have been tanking owing to the concerns in the stability of the banking system.

“There is a lack of trust over private lenders now. In some cases, markets fear that books are somewhat cooked up. In all the cases, we will see a flight of deposits from private banks, putting pressure on their capital,” a CEO of a top mutual fund told DH, wishing anonymity.