Indian stock market commands a premium valuation and has always been considered relatively expensive for a long period compared to its Emerging Market (EM) peers. This is because of India’s strong micro and macro dynamics, which creates the base for premium Price to Earnings (P/E) ratio of the benchmark index Nifty 50, analysts said.
However, the Nifty 50 index has fallen more than 3% from its all-time high level of above 25,000-mark hit at the beginning of this month. Nifty 50 now trades at 20.3x its one-year forward earnings. Following the recent correction, it is fairly valued and within its 10-year forward average multiple of 20.4x, analysts at Motilal Oswal Financial Services (MOFSL) said.
MOFSL expects the Nifty 50 is fairly valued and expects it to maintain this level going forward.
“We expect the earnings momentum to sustain; albeit, the magnitude of its growth is expected to moderate to ~15% over FY24-26. The Nifty P/E remains well within its 10-year average range and is expected to maintain this level going forward. We remain constructive on the markets, and our preference is predominantly in favor of large-caps, as the valuations of mid- and small-cap indices are trading at a premium of 79% and 8% to Nifty 50, respectively,” MOFSL said in a strategy report.
Over the past five years, the Nifty 50 has delivered stellar returns at 17% CAGR, supported by equally impressive corporate earnings CAGR of 18%, resulting in an increase in Nifty profits to ₹7.9 lakh crore in FY24 from ₹3.5 lakh crore in FY19.
MOFSL has pointed out key reasons on why the Indian stock market is always considered expensive against EM peers. India enjoys its premium valuations firstly due to Nifty PAT, which has compounded by 25% over the last 3 years, 18% in 5 years and 12% over 10 years.
Secondly, India’s strong, continuous and stable political setup. The Prime Minister Narendra Modi-led NDA government coming back to power for the third consecutive term provides policy continuity and reforms momentum.
Moreover, India’s GDP growth rate ranging between 6% and 7% during this period and healthy macroeconomic condition, with stable currency, twin deficits under control, peaking of interest rates, moderating inflation print, and massive development of digital and physical infrastructure, all support the premium valuation, according to MOFSL analysts.
In FY07, the 10-year rolling average trailing P/E was only 14.0x but it increased to 15.5x in FY12, 19.1x in FY19 and 22.6x in August 2024. The re-rating has been consistent and incremental over 17+ years, similar with the growth potential and earnings delivery of these stocks, according to MOFSL.
This trend has been driven by the inclusion of high P/E names in retail, logistics, and consumer sectors. Since FY07, the trailing P/E has nearly doubled for the Metals, Auto, Technology, Oil & Gas, Cement, Telecom and Healthcare sectors. In contrast, it has remained flat for the BFSI (ex-Insurance), Consumer, and Utility sectors.
Between FY14 and FY23, the market capitalisation contribution of secular sectors - Private Banks, Consumer, Retail and Technology - to Nifty 50 was 3 percentage points (p.p.) to 11 p.p. higher versus its Nifty PAT contribution. However, since FY20, the gap has been reducing and in FY24, the trends have nearly converged as these stocks have underperformed.
“Their earnings are likely to clock 13% CAGR over FY24-FY26E, while for the Nifty 50, the CAGR is expected to be at 15% over the same period. Due to the higher possibility of rate cuts by the Fed, an expected revival in consumer demand, the emergence of AI-based themes, and a potential revival in IT spending towards the end of CY24, the risk-reward dynamics appear in favor of it,” MOFSL said in a report.
Within Nifty, the domestic and global cyclicals trade at a one-year forward P/E of 18.2x and 15.2x, respectively. Meanwhile, the Nifty 50 defensive basket is trading at 29x one-year forward P/E, at a 43% premium to the index, the MOFSL report highlighted.
Moreover, of the 17 Nifty 50 sectors, Private Banks, PSU Banks and NBFCs are currently trading at 18%, 13% and 5% discounts to their 10-year average forward P/E, while the rest 14 trade at a premium.
According to MOFSL, the banking sector valuations are not completely factoring in the recapitalized balance sheets of PSU Banks, decadal low net NPAs, and a robust 15-16% credit growth.
“With the possibility of a rate cut by the RBI delayed, net interest margins (NIMs) may still remain stable at current levels, albeit, with a slight decline due to rising borrowing costs. Private Banks are currently trading at an 18% discount on a forward multiple basis. The discount remains relatively consistent on a trailing and forward basis, indicating parity in historical earnings growth and future 12-month expectations, MOFSL said.
The brokerage firm continues to remain bullish on PSU Banks, Consumption, Industrials, and Real Estate, and it has turned constructive on Technology. It also remains positive on Healthcare, and remains Underweight on Private Banks and Energy.
MOFSL’s top stock ideas include:
Largecaps – ICICI Bank, SBI, HUL, L&T, HCL Technologies, M&M, Coal India, Titan Company, Hindalco Industries and Mankind Pharma.
Midcaps and Smallcaps – Indian Hotels, Godrej Properties, Ashok Leyland, Persistent System, Kaylan Jewellers, KEI Industries, Metro Brands, PNB Housing Finance, Cello World and Angel One.
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.
