Foreign investors are buying Indian financial firms, attracted by prospects of a fresh credit cycle, which could boost shares of the country’s largest lender.
Indian shares are trading at a record-high valuation premium to their Asian counterparts, BNP Paribas said, but foreign investors have found a bright spot in the financials, finding their strong fundamentals relatively cheap.
Data released by the National Securities Depository Ltd this week showed optimism was reflected in the inflow as foreign investors bought net purchases of Indian financial stocks worth $1.74 billion in November.
This is more than a third of the total net inflows of $4.44 billion for the month.
‘Delicious’ evaluation
Indian financial stocks are trading at a premium to their historical averages, but that’s not necessarily what comparable investors are seeing.
“As a foreign investor, when you compare valuations across India, financials seem more reasonably priced than some other sectors,” said Rob Brewis, fund manager at UK-based Aubrey Capital Management.
Paying double-digit multiples for consumer banks like HDFC Bank Ltd. or ICICI Bank Ltd. is “more palatable,” Brewis said, because loan growth prospects in India are “better than almost anywhere else in emerging markets.”
The six fund managers Reuters spoke to were optimistic about a new capex cycle in India, driven by infrastructure investments from the government.
This growth cycle coincides with the cleanest balance sheets of banks in the last five-six years and average corporate leverage at a decade low, Manishi Roychowdhury, head of equity research, Asia Pacific at BNP Paribas, wrote in a note .
India is considered one of the fastest growing economies in the world and corporate earnings growth is expected to be the strongest in Asia. This has prompted local and foreign investors to pour money into the domestic equity markets, which hit an all-time high last week.
Given the improved macro outlook and continued investment by financial firms, especially large private sector banks, in improving their franchise and process capabilities, private banks are set to gain market share, said Sukumar Raja, director of portfolio management, Franklin Templeton. are in a good position to do so. EM Equity.
“Even after the recent rally, we still see some scope for re-ratings in select names.”
The optimism comes despite financial stocks trading at a premium to their two-year historical averages based on price-to-book valuations.
‘China risk’
Considering the growth potential, valuations of Indian equities have always been relatively high, but heavy selling in other countries has widened the disparity with emerging market peers this year.
While India’s benchmark stock index has gained 7.3% so far this year, stocks in China, South Korea and Taiwan have fallen between 12% and 19%.
But this cannot continue.
“In the face of rising external risks, India finds it difficult to sustain this level of valuation premium relative to other markets,” said Sat Duhra, Asia equity portfolio manager at Janus Henderson Investors.
A bigger risk, Mr Dhura said, was a sustained rebound in China due to relaxation of its zero-Covid policy, noting that India has been a beneficiary of China’s declining share in emerging market indices.