Summary: India’s stock market capitalization has dramatically exceeded its GDP, standing at Rs. 550 trillion on August 30, 2024, compared to a GDP of Rs. 400 trillion. This equates to a market cap 137.8% of GDP, indicating a significant outpacing of market growth over economic expansion. High stock valuations, exemplified by TCS’s share price of Rs. 4,460 and a P/E ratio of 35.90, reflect investor willingness to pay for future earnings. This speculative trend, including extreme IPO oversubscriptions like Resourceful Automobile’s 400-fold oversubscription, exacerbates volatility and can lead to “financialisation,” where financial markets overshadow real economic growth. This financial dominance contributes to “demand-pull” inflation, where high investor profits drive up consumer demand beyond production capacities. With market values rapidly increasing, the focus should shift to P/E ratios for evaluating stock worth, with ratios above 25 considered overvalued. Currently, stocks like Asian Paints and Divi’s Laboratories exhibit high P/E ratios, signaling potential overvaluation. The average NIFTY 50 P/E ratio of 23.10 masks such discrepancies, emphasizing the need for cautious investment strategies amid these market dynamics.
INDIA’S STOCK MARKET CAPITALISATION OVERWEIGHS ITS GDP Rs. 5.5. TRILLION AND TICKING—MARKET CAPITALISTION(MC) OF INDIAN STOCKS STANDS AT 137.8% OF OUR GDP! What does this imply for the stock market investors? India’s GDP at nominal value (current prices) is Rs. 400 trillion now. On August 30, 2024, the total market value of the shares traded on the NSE stood at Rs. 550 trillion.
The MC is constantly OUTPACING our GDP growth significantly. SO WHAT? The shares in a company, AT FACE VALUE, represent the “Units of Ownership” of the company to the shareholders. The benefits of investing in shares include capital appreciation, dividends, and, in the event of the company’s liquidation, a proportionate share in the surplus assets remaining after paying off ALL its liabilities, other than the shareholders. HOW DOES THE CAPITAL INVESTED APPRECIATE? This is governed mainly by the demand-supply position. Thus, if you had invested in the TCS shares at the face value of Rs. 1 years ago, you would find that their MARKET PRICE at the close of September 6, 2024, is an incredible Rs. 4, 460! IS THIS MARKET VALUE JUSTIFIED?
The market value of a share is primarily driven, among other ratios, by the P/E ratio or the Price to Earnings ratio. This is calculated by dividing the share’s market price on any day by its “Earnings Per Share” according to its latest financial report, which is generally quarterly. The PE ratio of TCS shares as of September 6 is 35.90. THIS MEANS THAT, FOR EVERY RUPEE EARNED BY THE TCS SHARE, THE INVESTORS ARE WILLING TO BUY IT AT Rs. 35.90! This means that we are paying NOW for TCS’s future earnings. Dividing the market price of 4460 by 35.90 gives the current EPS of TCS as Rs. 124.23. This price is NOT anchored on the company’s present fundamentals. When some “experts” say the “fundamentals are strong,” do not get carried away by this. The EUPHORIC expectation, not a realistic assessment, is pushing the prices up. Speculation in the derivative markets further aggravates volatility.
A RECENT INSTANCE OF PEOPLE’S SPECULATIVE URGE On August 26 this year, the Delhi two-wheeler dealer Resourceful Automobile’s IPO of JUST Rs. 12 Crs was oversubscribed 400 times to 4,800 crores! This company is a small, Delhi-based dealership primarily selling Yamaha motorcycles and scooters. APPRECIATION OF SHARE VALUES DOES NOT CREATE ANY TANGIBLE GOODS OR SERVICES FOR CONSUMPTION WHEN THE APPRECIATION OVERWEIGHS THE GDP GROWTH This has been happening in India for some years now. So, when the investors keep booking profits regularly, they use this money to consume goods and services. This spikes the demand for these, which the companies cannot meet at their current production capacities. THIS LEADS TO WHAT IS CALLED THE “DEMAND-PULL” INFLATION. Part of the spike in our inflation is attributable to this phenomenon. THE PERILS OF “FINANCIALISATION.” Shares are financial assets; they cannot be consumed as such. When market capitalisation overtakes GDP growth, it leads to what is known as “financialisaton.” When this happens, the financial markets dominate the macroeconomic policy decisions and outcomes.
The financial sector and markets ARE MEANT TO SUPPORT economic growth, NOT dominate it. India, a “Low-Middle Income” country with a per capita income of just $ 2731, cannot afford Financialisation to spike our inflation and STIFLE ECONOMIC GROWTH. According to NSE, the market took just six months to leap from $4 trillion to $5 trillion by May 2024. It added another half-trillion in the last three months, taking India’s market cap to a neat $5.5 trillion as of August 30. WHAT PE RATIO IS CONSIDERED A FAIR VALUATION? A PE ratio of 20-25 is considered a fair valuation. A better ratio is the PE/TTM, a valuation ratio that compares a stock’s current price to its earnings per share (EPS) over the previous 12 months. The formula for P/E (TTM) is the current share price divided by the company’s trailing 12-month EPS. From the perspective of PETTM, some of the shares that are overvalued at present are:
- Asian Paints—————-61.8
- Divi’s Laboratories——– 81.5
- HUL————————– 64.5
- Nestle India Ltd———— 74.4
- Sun Pharma—————- 42.1
- Britania Inds—————- 64.3
- Bajaj Auto——————- 37.8
- Bharti Airtel—————– 89.0
- Tech Mahindra————- 63.1
- L&T————————– 37.6
CONCLUSION
The NIFTY 50 PE ratio as of 06.09.2024 looks benign at 23.10. But this average conceals the overvalued companies like the ones listed above. Hence, when making stock investment decisions, consider the PE ratio as one of the deciding factors. Ramdas Iyer 09.09.2024
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