The stupendous rise in the Indian benchmark indices – the S&P BSE Sensex and the Nifty50 – has given rise to valuation concerns in the past few months, at a time when commodity price-fuelled inflation concerns are rearing their head again.
After UBS, which downgraded India to “underweight” from “overweight”, now Nomura has also downgraded Indian equities to “neutral” from “overweight”, citing unfavourable risk-reward.
Nomura has said: “We now see an unfavourable risk-reward given valuations, as a number of positives appear to be priced in, whilst headwinds are emerging… India’s valuation appears “very stretched” as 77 per cent of domestic stocks in the MSCI index are trading higher than the pre-pandemic or post 2018 average valuations”.
The rise in inflation, coupled with high valuations, has triggered a correction in the past few sessions which have seen the Sensex slip below the 61,000 mark, and the Nifty below 18,000.
The price-to-earnings ratio, or the P-E, is one of the most widely used tools by which investors and analysts determine a stock's relative valuation.
Amit Sachdeva of HSBC believes high P-E of Indian equity benchmarks is the ‘new norm’ in this liquidity-driven market. But not all are convinced.
A quick check of the stocks that comprise the BSE 500 index reveals startling results. Some stocks like Piramal Enterprises, Ujjivan Financial Services, Adani Green, Ruote Mobile and IDFC are trading at an astronomical P-E of 545 times to 910 times their FY22 earnings.
Santosh Singh, head of research at Motilal Oswal AMC, says any liquidity-driven rally that is not backed by fundamentals will not last:
- Recent rally was not based on fundamentals
- Certain stocks are commanding high double or triple digit forward P-E
- Liquidity-driven valuation will not sustain
Does this mean there’s more pain in store for the markets? Santosh Singh, head of research at Motilal Oswal AMC, says:
- Not worried about markets
- Financials will see earnings upgrade, supporting benchmarks
- However, individual stocks with high P-E will see a significant fall
Given this, the road ahead for the markets looks choppy, with stock-specific correction taking the centre stage. On an immediate basis, corporate earnings will sway the market mood today, as many prominent names like Axis Bank, Bajaj Finance, Cipla, and Dr Lal Path Labs are set to report their results.
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