The Indian stock market indices scaled their record highs amid volatility on Thursday with the benchmark Nifty 50 surpassing the 22,600 level supported by positive global cues. Gains in the market were broad-based as the midcap and smallcap indices also traded higher.
The Nifty 50 index has gained nearly 3% in 2024 so far, but the broader markets have outperformed the benchmark as the Nifty Smallcap 100 rallied 6.8%, while the Nifty Midcap 100 index surged 7.7% YTD.
During the last twelve months, the midcap and smallcap indices have gained 65% and 78%, respectively, while largecaps have risen by only 29%. During the last five years, midcaps have outperformed largecaps by 71%, while smallcaps have outperformed largecaps by 37%.
According to brokerage firm Motilal Oswal Financial Services, India is currently enjoying the confluence of the best macro and micro tailwinds, such as moderating inflation prints, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings.
Nifty Valuations
The Nifty is trading at a 12-month forward P/E ratio of 19.4x, which is largely in line with its long-period average (LPA) of 20.3x even as broader markets trade at expensive valuations – the NSE Midcap 100 index trading at 46% premium to Nifty. Conversely, the P/B ratio of 3.2x represents a 15% premium to its historical average of 2.8x. Motilal Oswal said in a report.
As per the data, half of the Nifty constituents are trading at a premium valuation to their historical average.
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Among companies trading at a significant premium to their historical average include Grasim Industries, which trades at a 74% premium, followed by Bajaj Auto (66%), Reliance Industries (62%), Adani Ports & SEZ (47%), and HCL Technologies (43%).
Stocks trading at a significant discount to their historical average are Tata Steel (-28%), Dr Reddy’s Laboratories (-26%), Eicher Motors (-24%), ONGC (-22%), and Apollo Hospitals (-18%), said the brokerage report.
Sectoral Valuations
Moreover, two-thirds of sectoral indices also trade at a premium valuation to their historical average.
Capital Goods Sector: The Capital Goods sector is trading at 44.6x one-year forward P/E, above its 10-year average of 30.8x, a 45% premium, indicating a potential fair valuation amid anticipated capex growth. On a P/B basis, the sector is trading at 7.9x, a significant premium to its 10-year average multiple of 3.2x.
“The sector is seeing a robust increase in order activity; however, there might be a short-term blip owing to the election cycle. Moreover, companies maintain strong balance sheets to support future capex,” Motilal Oswal said.
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Healthcare Sector: The Healthcare sector is trading at a P/E of 31.3x, 17% premium to the 10-year average, just above +1 standard deviation. Over the past 12 months, the sector has risen by almost 34%.
Automobile Sector: The Auto sector is trading at a P/E of 23.7x, below its 10-year historical average of 27.0x, which is at 13% discount. On a P/B basis, it is trading at a 35% premium to its 10-year average of 3.4x.
Private Banks: The Private Banks sector is currently trading at a P/B ratio of 2.3x, which is below its 10-year average of 2.5x, representing 11% discount, while its RoE stands at a 10-year peak of 15.6%.
“The momentum in loan growth remains intact, driven largely by consistent advancements in the Retail and SME sectors. Additionally, there has been a resurgence in the corporate segment, with positive trends observed in areas such as real estate and NBFCs. Most private sector banks have seen a contraction in margins due to high costs and concerns over loan growth given stretched LDR,” Motilal Oswal noted.
Top Picks
Motilal Oswal prefers PSU Banks, Industrials (Capital Goods and Cement), Real Estate, Consumer Discretionary, and NBFCs, while it is Underweight on IT and Metals. It has recently upgraded Energy to ‘Neutral’ and downgraded Auto and Pharma to ‘Neutral’ in its model portfolio.
In the largecaps, Motilal Oswal’s top ideas include L&T, SBI, ICICI Bank, Coal India, Titan Company, M&M, GAIL India, ITC, HCL Technologies, Cipla and Zomato.
In the Midcap and Smallcap space, it picks Indian Hotels, Godrej Properties, Sobha Developers, Dalmia Bharat, IIFL Finance, Cello World, PNB Housing, Lemon Tree Hotels, and Global Health.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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