Nifty forward PE at 20: When should you go shopping for value bets?

India’s share in global market capitalisation dropped to its 10-year historical average of 2.5 per cent following the ongoing selloff in the domestic equity market, brokerage firm Motilal Oswal Financial Services said in a report.

After rising over 3 per cent in August and 6 per cent in July, a couple of macro headwinds dragged equity indices Sensex and Nifty down by over 6 per cent in September. The indices have lost another 2.5 per cent each so far in October.

Rising crude oil prices, coupled with currency depreciation, has been a key macro concern for the market, as it can make the task of fiscal management challenging amid rising bond yields.


ILFS debt default and concerns over liquidity tightening and its potential impact on funding cost also resulted in a significant correction in financials stocks.

Market capitalisation of BSE’s listed firm tanked by nearly Rs 16 lakh crore to Rs 143.61 lakh crore on October 3 from Rs 159.35 lakh crore on August 31.

When to start buying?
The steep correction in the market has brought the benchmark indices to levels they last traded in July, 2018.

Does it mean the market has come to a level where long-term value investors can look to buy potential value bets?

Not quite. According to Motilal Oswal, Nifty trades at 20 times FY19E EPS, which is off the recent highs, but is still rich.

“Our portfolio strategy remains premised on ‘when the going gets tough, the tough get going’. Our preference still remains with largecaps, given the premium of midcaps to largecaps amidst an environment of challenging macros, potential slowdown in domestic equity flows and a forthcoming busy political calendar,” the brokerage house added.

Despite the recent meltdown, India has stood out in CY18 with significant outperformance as against other emerging markets. However, it has happened so far without any tangible and meaningful earnings rebound, even as expectations for earnings revival stay lofty.

This has expanded valuation premium compared with both historical averages and emerging market peers.

Should you start buying now?
Investors can get into quality companies where valuations are not stretched. “We believe consumption as a theme will do well in the coming months, as demand from rural and urban areas start to pick up based on the various programs undertaken by the govt. We prefer names such as Marico and HUL from this space,” said Hemang Jani, Head of Advisory at Sharekhan by BNP Paribas.

“With the turmoil caused by the IL&FS fiasco, we believe NBFC stocks will continue to be under pressure in the short term, as their margins get impacted due to a higher cost of borrowing,” he said.

Motilal Oswal continued to advocate a strategy centered around earnings visibility with incremental higher allocation to defensives, especially pharmaceuticals.

“The correction in autos does present an opportunity to increase exposure from a medium- to long-term perspective. Challenges for NBFC in the liquidity tightening environment could create opportunities for high-quality CASA-funded private banks,” it said.

The brokerage prefers ICICI Bank, HDFC Bank, Axis Bank, Titan, Maruti, HUL, L&T, Infosys, HDFC, Sun Pharma from among largecaps and RBL, Ashok Leyland, Mindtree, Tata Chemicals, Team Lease and Emami from the midcap space.