New Delhi: The high valuation of the Indian equity market is justified because of the strong fundamentals of the Indian companies as compared to other emerging markets globally, highlighted a report by Allianz Global Investors.
It also noted strong corporate earnings and cash flows are expected to continue, providing long-term support for higher valuations.
"While India equity valuations are higher than other emerging markets, in our view this is justified given the strength of the underlying business fundamentals, which we believe suggests corporates should continue to deliver superior earnings and cash flows" the report added.
Despite concerns about its high valuations, the report mentioned that Indian stock market is in a strong position to maintain a higher price-to-earnings (P/E) ratio over time.
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The report highlighted that India's ability to consistently show sustained growth, along with high-quality earnings, sets it apart from other markets.
"While some investors might feel queasy about the high valuations in the Indian stock markets, a country that consistently demonstrates a sustained growth trajectory, combined with high quality earnings that translate into superior EPS and ROE, is in our view well-positioned to sustain a higher price-to-earnings (P/E) ratio over time" said the report.
As per the report, this growth translates into superior earnings per share (EPS) and return on equity (ROE), which helps justify the higher P/E ratio.
The report further noted that India's economic growth is driven by its large services and consumer sectors, which distinguish it from other emerging markets.
Unlike countries that heavily rely on state-owned enterprises or focus on industries like materials, India has cultivated an open, competitive market environment. This allows private enterprises to have pricing freedom, fostering innovation and enabling businesses to develop competitive advantages.
India's reduced dependence on state-owned enterprises has also been crucial in building a more resilient and diversified economy. These factors combined make India an attractive market for investors despite its relatively higher valuations.
According to the report analysis, these strong underlying fundamentals suggest that the country's stock market is well-positioned for continued growth and can sustain its higher P/E ratio in the years ahead.
—ANI