Perceived risk for India lower due to strong regulatory framework and institutions: Report

New Delhi, Aug 26 The perceived risk for India is lower due to a strong and proactive regulatory framework and institutions, a report said on Tuesday, saying that the average return on equity (ROE) is higher than that of other major countries.

India (Nifty 50) is currently trading at a price-to-earnings (PE) of 20x (20 per cent premium to its 10-year average). Compared to other countries like China, Indonesia, South Korea, etc, it's 60 per cent more expensive, according to the report by HSBC Global Investment Research.

"There are multiple credible reasons to justify India's high valuations, and likely most of these may remain intact in the near term. Still, we believe long-term risks around growth and falling ROE need to be acknowledged," the report said.

In India, household (HH) penetration of the bulk of discretionary products is low. This means that with growing per-capita income, most of the categories could continue to see sustained growth for many years.

This includes automobiles, healthcare, insurance, consumer durables, etc. High long-term growth in the discounted cash flow (DCF) models translates to a high P/E multiple.

"Average India ROE is higher than those of other major countries. This is true across sectors like automobiles, consumer staples, insurance, hospitals and even banks. Many reasons for higher return ratios. For sectors like automobiles, the reinvestment rate and working capital requirements are much lower in India," the report noted.

Banks' average ROA is around 1.2 per cent in India compared to 0.7 per cent in China. For consumer companies, ROE is significantly higher due to pricing power and distribution strength.

While the share of domestic ownership has increased significantly in the past few years, there is still a long way to go.

"For India, we believe the perceived risk is lower due to multiple reasons. India has rarely been impacted by a sharp macro crisis, unlike many other large economies. A big credit also goes to the very proactive regulatory regime in India, where regulators have been very agile to prevent economic bubbles (excluding small cycles like ILFS in 2018 and unsecured in 2008-10)," the report mentioned.

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