India’s high valuations are justified, says Goldman Sachs citing rise of multibaggers and these other reasons

• A report by Goldman Sachs has highlighted why the Indian market can justify its present high valuations
  
• India has delivered the highest number of multibaggers over the last five years, finds the report.
  
• The report also highlights the importance of RBI managing to curtail the inflation print in the last few months.

For long, pundits have argued that Indian stocks are too pricey. However, there's a reason why India commands a premium in today’s time compared to the pack of emerging markets and even the BRICS economies. Over the last two decades, India’s economic growth has grown sevenfold and the BSE 200 has delivered annualised returns of 16% in rupee and 13% in dollar terms over this period. In comparison, other MSCI EM Index has delivered a modest 7% annualised returns. These returns are representative of the index heavyweights, but if one dives a little deeper, one finds 40% of BSE 200 stocks have delivered returns of more than 20% annualised returns over the last two decades.

Yes, India is not a cheap market, but there’s a reason behind it. An exhaustive study done by Goldman Sachs shows that India has delivered the highest number of multibaggers over the last five years. In its report titled ‘Investing in India’s medium term growth story: Identifying potential multibaggers,’ Goldman Sachs says: “In India, more than half (54%) of the NSE 500 (269 stocks) generated 10-bagger returns, the largest proportion of multibaggers among the 10 markets (versus 30%/20% averages for Emerging market/developed market).

The report notes that the 269 multibagger stocks all share a number of the following traits:

1. High realized growth rates
   
2. High capital return ratios
   
3. Mid/small-cap bias
   
4. Inexpensive starting valuations
   
5. Domestic sector orientation
   
6. High promoter holding.

India’s macroeconomic resilience and ability to counter shocks like the aftermath of the pandemic and geopolitical crisis have surprised global investors. While the rest of the central banks across the world continue to battle inflationary pressures, India’s central bank has managed to curtail the inflation print in the last few months. The Reserve Bank of India’s rate hike cycle appears to have peaked, thus setting the stage for a sustained rally in equities once the rate cycle turns some time next year. India’s resilient macros and improving micro environment has prompted the global investment bank to recommend building up India exposure to its investors.

The investment thesis of GS is based on India’s higher growth potential and its ability to generate even higher returns from equities compared to other emerging and developed markets. India’s GDP has grown from $0.5 trillion in 2002 to $3.4 trillion at present. Despite the cyclical slowdown seen in the years prior to the Covid pandemic, nominal GDP has grown at 10% CAGR over the past two decades. Economists at Goldman Sachs expect India’s real GDP to grow at a CAGR of 6.7% in the next ten years against the 6.4% it grew between 2002 and 2022. GS expects India to become a $5 trillion economy by 2026.

During these two decades, India’s aggregate market capitalisation has grown by 12-fold since 2003. India’s average market capitalisation to GDP ratio has increased from 76% (2003-13) to 87% over 2013-23.

According to Goldman Sachs, “The realised long-term equity returns at the headline index level have also been compelling. Over the past two decades, NIFTY 50 and the broader BSE 200 index have offered 15-16% annualized returns in local currency, and 12-13% in USD terms, almost double the 7% offered by the MSCI EM index. The 20-year USD annualized return for India has also led major equity markets globally (US, Europe, Japan and Asian peers), although the US markets have fared better in the recent decade, given superior earnings delivery.”