When it comes to company valuation, you’ll see that Indian markets always trade at a premium over emerging markets.
The question is, why does it trade in premium? Is it good to trade at a high premium?
Here’s a GDP comparison between India and China. You can see that China’s GDP is more than India’s, but India’s equity return has been higher than China’s.
| India | China | |
|---|---|---|
| GDP (USD trillion) | $2.9 | $14.3 |
| Real GDP growth (20Y CAGR) | 7% | 9% |
| Equity Returns | 1,169% | 741% |
| PE Multiples 10Y | 20x | 12x |
Despite China’s faster growth, you can see. This shows clearly that high growth does not explain valuation.
Corporate governance and Quality of underlying assets are key factors for Valuation. These would be the basic frame work for evaluating good business.
If you see a business that has a positive return, it is a sign of the quality of the underlying service correct? This eventually helps in long-term scalability and growth, along with these, good corporate governance.
When there is poor corporate governance, minority shareholders are the one who will be affected and treated unfairly. When a company‟s governance is tested, it trades at a discount, whereas a company that is well-governed trades at a premium.
Can we evaluate emerging countries using the same criteria?
A country’s market capitalization is simply the total value of all its listed companies.
As an example, suppose a country doesn’t have strong property rights and well-protected laws in response to the various challenges it faces. It may see a bad turn of events.
If you look at any strong democracies, you’ll see that having powerful legislative, executive, and judiciary. Having these will help establish credibility in order to protect the people of the country. In any country, independent institutions such as the judiciary, central bank, and election commission help to protect the property rights.
Take a look at the BTI rating on Separation of Powers. India is one of the highest-rated countries in terms of power separation.
India hasn’t had a currency crisis, debt crisis, or political crisis in the recent decade. One of the main indications of emerging markets.
The risk premium is lower in India since these things haven’t happened. Another reason why Indian markets trade at a premium is because of this. In comparison to other countries.
India is one of the most democratic nations.
It is possible to build super-advanced infrastructures such as roads, highways, and housing, but it is difficult to establish a proper framework in the judiciary, central bank, and election commission. Another reason India trades at a premium.
Even the multiples are mostly influenced by the level of democracy.
Another point to consider is that the number of state-owned entities in India is low, which makes it a solid point. Typically, state-owned companies prioritize the political and social well-being of the countries over generating investor returns. These companies eventually lose market share to other private companies in the country.
India’s share of PSUs is under 6%. One of the main reasons why the Indian market is trades higher.
India has the most diversified asset mix.
Take a look at Taiwan and Korea, where technology accounts for 68.6% and 40.4%, respectively. In Korea, Samsung Group accounts for 39% of 40.4%.
In India, it’s 24.3 % from financials, with large banks like HDFC and Kotak accounting for this. As you can see, India as a country doesn’t have large exposure in a single sector.
During market corrections, India is the most resilient.
What are your thoughts on Indian Market trading at a premium?
