If one believes in India’s long-term growth story, it may just be time to take the plunge as many of the blue chips such as Maruti Suzuki, Tata Power and Dr Reddy’s trade at a valuation lower than the post Lehman Brothers trough in March 2009.
The global selloff in equities that wiped out more than $3 trillion in wealth has been indiscriminate with even companies having more than 30% earnings growth bearing the brunt despite their fundamentals turning stronger. Rising cost of funds and input prices may slow revenue growth and squeeze their profitability, but a possible slide in commodity prices may turn out to be a blessing in disguise.
Even if macro fundamentals deteriorate, efficient companies could outperform. “The common perception is that earnings growth is highly levered to the economic growth,” said a recent note from Morgan Stanley. “Operating leverage has been falling and is at an 8-year low. The sensitivity of earnings to macro growth is likely to be lower than history.” “Earnings seem relatively better protected compared to a growth slowdown in 2008-09.”
At least 17 companies in the BSE’s A group list currently trade at a lower price-earnings ratio compared to that in March 2009, when the benchmark Sensex had fallen to its 30-month low, a study by ET Intelligence Group shows. Some of the most frequently-traded companies with sound fundamentals are at lower valuations than in March 9, 2009, when the Sensex had crashed to as low as 8,160.
The absolute index numbers may be misleading too as earnings have risen substantially in the three years between the Lehman collapse and an impending Euro zone crisis. The P/E ratio for the Sensex is also lower at 15 times, compared with 23 times in March 2009, when it fell to multi-year lows.
