Are Nifty stocks, sectors expensive at current valuations? Let's check history

NEW DELHI: After reaching the historic milestone of 20,222 on September 15, Nifty has not been able to digest the peak with FIIs sucking out cash from Dalal Street. Besides global macro headwinds related to crude oil and the threat of the Fed's higher-for-longer policy, valuations have also kept the equity boom in check.

More than half of the sectors like PSU banks, infrastructure, cement, consumer, NBFCs, and real estate are trading at a premium to their historical averages but when you look at Nifty stocks half of them are trading at a discount to their historical averages, Motilal Oswal data shows.

Nifty stocks that are trading at a significant discount to their historical averages are ONGC (-45%), BPCL (-41%), Tata Steel (-38%), Apollo Hospital (-31%), and Eicher Motors (-28%).


As a sector, PSU banks are trading at a P/B of 1.1x, at a 30% premium to its historical average of 0.8x while the consumer sector’s P/E of 41.7x implies a 4% premium to its 10-year average of 40x. Similarly, technology is trading at a P/E ratio of 23.2x, an 18% premium to its long-term average of 19.6x.

On the other hand, the auto sector is trading at a P/E of 20.9x, below its 10-year historical average of 26.7x (22% discount). The logistics sector is trading at a P/E ratio of 29.1x, below its historical average of 32.4x (10% discount), media and retail sectors at a 19% discount.

How expensive is Nifty?
The headline index is currently trading at 18.4x on a 12-month forward PR basis, which stands slightly below 1std to its long-term average of 16x, show calculations done by Axis Securities. However, it is trading slightly above the long-term average on a 12M Fwd PB.

Current valuations are slightly below a 5-year average (18.8x), providing a good entry point for long-term investors, the brokerage said.

Bond Equity Earnings Yields Ratio (BEER), used to evaluate the relationship between bond yields and earnings yield, is now trading above its long-term average to suggest that the stock market is slightly more expensive than the bond market at current levels. The attractiveness of equities is diminished with attractive opportunities present in bonds, analysts say.

When you look at the total market capitalisation to GDP ratio, also known as the Buffett Indicator, it is at 102% and looks fairly valued.

Citing the sharp rally since March lows, global macro risks, and expensive valuations, global brokerage firm Goldman Sachs adopted a cautious stance on Indian equities but Nomura has upgraded India to overweight.

"Valuations are expensive but will likely remain so in a scenario of policy/government continuity. A cyclical slowdown from a high base is expected, but will unlikely deter investor optimism, in our view. Intense politicking into the May 2024 elections, China's re-rotation and sustained high oil prices are potential risks," Nomura said.

Should long-term investors be worried?
While India is trading at a premium to its emerging market peers, the valuations need to be understood from a growth perspective.

"India is the fastest growing large economy and has the advantage of a stable political scenario, huge domestic market, favorable demography and seen as one of the alternates to China as a manufacturing hub. We believe the domestic economy will continue to enjoy a premium valuation as compared to its peers," said Dr Joseph Thomas, Head of Research, Emkay Wealth Management.

India is expected to deliver the highest two-year EPS growth among the top 19 equity markets in the world with a 17% CAGR over FY23-25, according to CLSA.

"We add HDFC Bank to our India focus portfolio and rebalance weights among the 13 stocks. A significant cool-off in the relative valuations of HDFC Bank to peers makes us like this big index heavyweight. Under the macro set-up of a prolonged hawkish rate pause with no imminent growth slowdown, we are now more overweight on banks along with energy and industrials, while IT and consumption remain our key underweights," said CLSA's Ayush Gandhi and Hemant Kothari.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)