Samit Vartak is an instructor at Asian Investing Summit 2017.

This report analyses how India’s current absolute valuations stack up against the last 15 years of history. Straight forward valuation multiples can be deceiving and may entice you in or keep you out of the markets at wrong times. To take care of this issue I have recalculated current as well as historical valuations by assuming normalized (or sustainable) profitability across all years. This is done at sectoral level so that we might observe the extent of relative over/under valuation and make some intelligent choices for portfolio positioning going forward. Risk with normalization is that the timing for the profitability to revert to sustainable level is uncertain. The longer it takes to revert, the higher would be the risk to valuation in situations when absolute valuations are high.

Total Universe: The starting universe for this analysis comprises all the companies (872) in the BSE 500, BSE Midcap and BSE Small Cap indices. After excluding companies who do not have 15 years of listed history, we are left with 557 companies. This universe covers about 80% (US$1.2 trillion) of the total listed current market capitalization. The chosen period FY02 – 16 covers years between two troughs in India’s economic cycle (not stock market cycles) and I believe covers a wide range of business environments representative of average conditions.

Mid/Small Cap Universe: The valuation as well as other parameters are weighted averages and hence are significantly influenced by large companies. To remove this effect, in addition to presenting the outcomes for all the 557 companies, I am also presenting similar analysis for non-large cap companies. This is done by excluding not only the top 10% of the largest companies but also removing outliers such as Suzlon, Jet Airways, Piramal Enterprises and Tata Steel who have had abnormally large one-off profits/losses skewing overall valuations. Post these exclusions, we are left with 496 companies totaling US$389 bn ($20 mn to $4.7 bn range) of market capitalization.

Same analysis is done for the Total and Mid/Small Cap Universes and hence you would find two sets of tables. First the summary tables are presented for both followed by detailed tables.

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This post has been excerpted from a letter of SageOne Investment Advisors.