Indian stocks are powering up
Indian equities have rallied post the government’s demonetization move last year in November. Following the move to ban 80% of the currency notes in circulation, Indian equities plunged and both foreign and domestic investors began offloading their holdings. However, since then, Indian equities have outperformed all major economies of the world, primarily driven by financials and infrastructure development related sectors.
Stocks like Bajaj Finance (BAJFINANCE), India Bulls Housing Finance (IBULHSGFIN), Housing Development Finance Ltd (HDFC), Power Finance Corporation (PFC), and Grasim (GRASIM) have generated 51%,54%, 29% 21% and 37% respectively.
Generally, banking stocks trade between 1x and 2x their book values.The PBV (price-to-book value) compares a company’s current market price to its book value. These ratios are commonly used to compare financial services firms because most banks’ assets and liabilities are constantly valued at market values. If a company trades lower than its book value, it means that either the asset value is overstated or the company is generating a poor return on its assets.
Valuations
Stocks in the Indian financials sector trade at an average price to book ratio of 3.4x. Bajaj Finance, India Bulls Housing Finance, HDFC and Power Finance Corporation currently trade at price to book multiples of 9.2x, 3.9x, 4.8x and 1.2x respectively.
Overall, Indian stock markets are trading at an average price to earnings multiple of 22.1x. Cement stocks currently trade at an average one year price to earnings multiple of 4.7x. Grasim has a PE ratio of 2.1x, suggesting it is inexpensive presently and has further upside.
