MUMBAI, Dec 6 (Reuters) – Foreign investors are buying into Indian financial firms, lured by the prospect of a new credit cycle that could boost shares in the country’s biggest lenders.
Indian stocks are trading at a record valuation premium over their Asian peers, BNP Paribas said, but foreign investors have found a bright spot in financials, believing them to be relatively cheap given their strong fundamentals.
The optimism is reflected in the inflows, with foreign investors buying Indian financial stocks worth a net $1.74 billion in November, according to data released this week by the National Securities Depository Ltd.
That’s more than a third of the total $4.44 billion in net inflows for the month.
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“TASTY” RATING
Indian financial stocks are trading at a premium to their historical average, but that’s not necessarily the comparison investors are looking to.
“As a foreign investor, if you compare valuations across India, financials appear more reasonably valued than some of the other sectors,” said Rob Brewis, fund manager at UK-based Aubrey Capital Management.
Paying double-digit multiples for consumer banks like HDFC Bank Ltd (HDBK.NS) or ICICI Bank Ltd (ICBK.NS) “is a lot tastier,” Brewis said, as the potential for credit growth in India “is probably better than almost anywhere.” otherwise in emerging markets.”
All six fund managers Reuters spoke to expressed optimism about a new investment cycle in India fueled by the government’s infrastructure investment.
This growth cycle coincides with the cleanest bank balance sheets in the last five to six years and average corporate debt at a decade low, Manishi Raychaudhuri, head of equity research, Asia Pacific at BNP Paribas, wrote in a note.
India is recognized as one of the fastest growing economies in the world and corporate earnings growth is expected to be among the strongest in Asia. This has prompted domestic and foreign investors to pour money into the domestic stock markets, which hit an all-time high last week.
Given the improving macroeconomic outlook and continued investment by financial firms, particularly larger private sector banks, to improve their franchise and process capabilities, private banks are well positioned to continue gaining market share, said Sukumar Rajah, Director of Portfolio Management, Franklin Templeton EM -Shares.
“Even after the recent rally, we still see scope for further re-evaluation of select names.”
The optimism comes even though financial stocks are trading at a premium to their two-year historical average on a price-to-book basis.
Indian stocks
CHINA RISK FOR PREMIUM RATING
Indian stock valuations have always been comparatively high to reflect growth potential, but the disparity with emerging market peers has widened this year on sharp sell-offs elsewhere.
While India’s benchmark equity index (.NSEI) is up 7.3% so far this year, stocks in China (.SSEC), South Korea (.KS11) and Taiwan (.TWII) are down between 12% and 19%.
But it must not go on like this.
“With external risks mounting, it’s hard to imagine India maintaining this valuation premium versus other markets,” said Sat Duhra, Asian equities portfolio manager at Janus Henderson Investors.
A major risk, Dhura said, is a continued recovery in China on easing of its zero-COVID policy, as India has benefited from China’s declining share of emerging market indices.
Reporting by Anushka Trivedi in Mumbai; Edited by Savio D’Souza
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