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Are valuations being stretched too far? Tejas Vahalia The upward move in the domestic equity markets is not showing any signs of relenting even as several analysts raise concerns about the valuations being stretched. The global equity rally is showing some signs of taking a breather as economic data in the US pertaining to employment and consumption has not been encouraging. But stock prices here seem unaffected. With the Sensex at 17,000 levels, the valuation comes out to 18 or 19 times estimated FY10 forward earnings. This is certainly not cheap and higher than the historical average of 15-16 times. A comfortable global liquidity situation has been one major factor supporting the market’s up move. In September itself, FIIs pumped in more than Rs 18,000 crore into Indian equities and on year-to-date basis they have been net buyers to the tune of more than Rs 58,000 crore. It now remains to be seen whether we see a repetition of what happened during the second half of 2007, when the Sensex swung from 17,000 levels to 21,000-plus in a short span ignoring the valuation concerns. A review by DBS Cholamandalam Securities Research says: "The market looks expensive at the current valuation and not much of room for upside is visible from the FY10 perspective. However, expanding risk appetite and ample liquidity for quality Indian papers can take the markets higher." Historic trends suggest that the market tends to correct at valuations of 18-19 times and buying tends to become more pronounced when the valuations touch 14-15 times. Among global markets, including emerging markets, India ranks third after Taiwan and China in terms of valuations. Says Varun Goel, assistant vice-president, fund management, Kantilal Chhaganlal Securities: "Although Chinese stocks are more expensive than ours, we have seen a narrowing in the valuation gap in recent times. In the last one month, the performance of Chinese stocks has been subdued whereas Indian stocks have continued to move up." It should also be noted that it would not be right to expect domestic valuations to stretch and match those of Chinese stocks as they exhibit relatively superior growth rates and, hence, command higher valuations.