Nifty’s hidden discount sale: 54% of top Indian stocks are cheaper now than in 2023. Is it time to buy?

Valuation correction has plunged more than half of India’s top-tier Nifty50 stocks into a discount sale, forcing a sharp recalibration of the risk-reward equation for investors. While headline indices mask the underlying damage, about 54% of Nifty stocks are now trading at cheaper 12-month forward price-to-earnings (P/E) multiples than they were in 2023, according to estimates.

The benchmark Nifty Index has slid 10% from its 52-week high as war in West Asia disrupts global supply chains and drives crude prices up, exposing corporate earnings to localized pressures. Yet, beneath this macro anxiety, a dramatic compression in stock multiples suggests the extreme market froth has been aggressively wrung out.

Nifty valuation de-rating

According to estimates by Prabhudas Lilladher, the Nifty Index is currently trading at 16.5x 1-year forward EPS, representing a 13.6% discount to its 15-year average P/E of 19.1x, and an 18.7% discount to its 10-year average P/E of 20.3x.

Among technology heavyweights, Tata Consultancy Services (TCS) has seen its forward P/E slashed nearly in half to 14x from 27.5x. Infosys has dropped to 15.4x from 25.2x, while Wipro has fallen to 14.4x from 20.3x.

Reliance Industries has plunged to a forward P/E of 19.6x from 31.4x. Adani Enterprises has plummeted to 70.3x from 112.1x. In consumer staples, Hindustan Unilever (HUL) has softened to 44.1 times PE from 57.2x.

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Conversely, a few counters have bucked the correction to become significantly more expensive than in 2023, such as Bharat Electronics (soaring to 41.1x from 19.7x) and Bajaj Auto (climbing to 25.1x from 15.6x).

"Our premium to emerging markets has collapsed from 86% to around 23–30% today. That re-rating downward is largely done," said Sailesh Raj Bhan, President & CIO of Equity Investments at Nippon India Mutual Fund told ET Markets. "De-rating from 20–22x P/E to 18x has already happened. From 18x, you're unlikely to go much lower in 12 months."

The primary catalyst for this P/E contraction is a stark slowdown in aggregate earnings velocity. HDFC Securities points out that the extraordinary corporate earnings growth CAGR of 18% over FY19–FY24 will normalize to approximately 9.5% over the FY24–FY27E period.

Furthermore, macroeconomic vulnerabilities are mounting. HDFC Securities warns: "We anticipate economy to face inflationary headwinds in FY27 led by commodity price rise and fuel price hikes. Probable El-Nino event may put rural economy under pressure due to reduced monsoon showers. Accordingly, in this inflationary environment, RBI’s stance on interest rates become a key monitorable." They also flag that the oil and gas sector, driven by OMCs, poses a distinct downside risk to aggregate earnings if the West Asian war escalates further.

Prabhudas Lilladher’s Amnish Aggarwal echoes this cautious near-term stance, noting that the Nifty free float EPS grew by just 1.6% in FY26. "Current valuations of 16.5x FY27 makes it expensive in comparison to many developed and emerging markets, notwithstanding the long-term growth potential in the economy," Aggarwal said. "Although markets are unlikely to show significant correction to breach recent lows, prolonged geopolitical uncertainty can further add to sharp swings."

Aggarwal notes that Nifty EPS has seen a marginal downward revision of -0.9% and -0.8% for FY27 and FY28 respectively, signaling a 15.9% EPS CAGR over FY26–FY28 (with FY27/28 EPS at Rs 1344 and Rs 1538).

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FII fear overdone?

Despite foreign institutional investors (FIIs) executing heavy exits, domestic portfolio managers maintain that India's long-term compounding narrative remains fully intact.

"Don't base the market solely on whether FIIs come back. They come when their cycle turns. FII selling has been going on for years and valuations haven't collapsed — that tells you something," Nippon India Mutual Fund’s Bhan stated. "What you should ask is: why would any investor put money in India? Because of longevity of growth. With 6–7% real GDP growth over 15–30 years, 3–4% nominal growth on top, you have an 11%+ compounding nominal GDP growth construct."

Bhan believes domestic equities will stage a recovery before foreign capital returns. "My personal view is that markets will rise before FIIs come back. They need a trigger too — earnings visibility. Right now that visibility is low because of elevated oil costs. The minute there's a sign of earnings recovery, market expectations will shift and FIIs will have to participate."

Where to invest money?

With the recent 10% index drawdown creating what HDFC Securities estimates as an "upside room of 10-15%," institutional players are shifting their sectoral weightings.

HDFC Securities states its preferred sectors are financials, industrials, power, real estate, chemicals, and consumer discretionary, while remaining underweight on energy, cement, and telecom.

Prabhudas Lilladher has adjusted its 12-month base-case Nifty target to 26,449 (down from 27,080 earlier), valuing the index at a 10% discount to its 15-year average P/E (at 17.2x on FY28 EPS). Its bull-case target stands at 29,387 (valuing Nifty at 19.1x P/E), while its worst-case bear scenario—modeling the index at its 2013 Eurozone crisis low of 13.5x P/E—projects a floor of 20,771.

In its model portfolio, Prabhudas Lilladher is increasing weights on Metals, Capital Goods and Engineering/defence, NBFCs, AMCs, Telecom, and Ports. It is cutting weights but remains overweight on Banks and Healthcare. Conversely, it retains an underweight stance on IT Services, Auto, Consumer, and Oil and Gas.

For long-term capital allocators, the sentiment pivot is being viewed as a tactical accumulation window rather than a crisis.

"The only negative is the sentiment shift — from extreme euphoria to extreme pessimism. When that happens, you get better prices," Bhan concluded. "I think, in general, the advice is: use this year to accumulate. If you've accumulated for one or two years, then in the third, fourth, and fifth year you make bigger money. In the next 12 months, you'll be in accumulation mode. It will keep going up and down... A lot of fundamentals are in good shape."

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