FIIs dump depository receipts on concerns of overvaluation

SBI, RIL, INFY, ICICI BANK AND STERLITE HAVE FALLEN UP TO 9% IN A WEEK

 IT COULD be a signal from overseas investors that valuations of Indian shares are stretched and further correction could be around the corner. Foreign investors, who were keen on buying depository receipts (DRs) of domestic companies till some time ago, are now cutting down their India exposure, following the swift run-up in stock prices over the past few months.
    Some of the most actively-traded DRs such as SBI, Reliance Industries, Infosys, ICICI Bank and Sterlite Industries have fallen 2-9% over the past one week, signalling the onset of selling by foreign investors. High-volume scrips, including Ranbaxy Labs, M&M, Tata Communications, SBI, Infosys and Reliance Industries, are also trading at a 2-4% discount to the local market. The Skindia GDR Index is trading at a 1% discount to the benchmark Sensex.
    "The market has been turning weaker over the past one week. Foreign investors are booking profits in their depository investments. Rising stock prices could be one of the reasons for the slackening interest in Indian companies. In the normal course, investors sell DRs when they suspect a correction is around the corner," said Shweta Rai, research analyst, Instanex Capital.
    Depository receipts represent stocks of companies trading on a foreign stock exchange. Many Indian companies with global ambitions have floated their shares on bourses in London, Luxembourg and New York to tap foreign investors. Domestic institutional investors look towards DRs for directional cues. Grasim, Tata Motors and Sterlite Industries are among receipts that are sold heavily in overseas markets.
    "I am cautiously optimistic about the market; remains to be seen how global markets will play out over the next few months," said Andrew Holland, CEO-equities, Ambit Capital.
With respect to valuations, Mr Holland considers Indian shares to be in a phase of stretched valuations. While prices have moved ahead, fundamentals have not improved much to support these prices. "Foreign investors like India over a longer investment horizon. Valuations are reasonably expensive for short-term investors," Mr Holland added.
According to equity analysts, current price levels — price earning ratio of 19-20 times forward earnings — can only be justified if one takes into consideration estimated earnings
    for 2010-11 fiscal.
    "There is a huge mismatch between market and analyst expectations; a fast and furious earnings upgrade will happen in the coming months," said an India Infoline research report.
    "With earnings understated, PE band charts are not reflective of the true picture. On a priceto-book basis, the market is currently at 3.8 times trailing book compared with a 10-year average of 3.7 times and a high (or low) range of 6.6 times (1.9 times), neither of which are too cheap or too outlandish as yet," the report added.
    shailesh.menon@timesgroup.com 

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