Nifty, Sensex Valuation Drop 'Misleading' Even As Pricey Stocks Become Cheaper

The deepening selloff in Indian stocks has made the long-time expensive stocks cheaper, with most large caps trading below their historic averages. Amid this, experts call for caution as the 'universe' valuation will be "misleading" given the weights.

India's benchmark index — the Nifty 50 — has seen its price-to-earnings ratio drop to 18.5 — a near two-year low. This compares to the 10-year average of 18.2 times and a recent peak of 23.8 times in September last year.

Within the key gauge, about 31 stocks are trading below their 10-year average levels, with stocks like Bharti Airtel Ltd. and State Bank of India among the most discounted.

Meanwhile, broader markets have seen an even deeper correction, given the record flows that the stocks saw last year. The BSE Small cap and Midcap indices trade at 21.4 and 25.1 times, compared to their 10-year averages of 16.8 and 24 times, respectively.

However, experts warn of an 'apples to oranges' comparison when seeing the price-to-earnings for the index. Weighted PE can be misleading as a handful of companies can move the whole universe, according to Samit Vartak, founding partner and chief investment officer of SageOne Investment Managers LLP.

Large caps should not be viewed as a single entity, but rather divided into three distinct segments — public sector undertakings, private banks, and the rest of the large-cap universe, Vartak said. "When they say large caps trade at 19 times earnings, it’s because of the mix."

PSU stocks trade at 8-10 times, private banks at 15-17 times, while the rest trade at 40-plus times, he explained.

On the other hand, the mid- and small-cap space lacks significant PSU and private banking representation. The majority of the mid- and small-cap buckets are trading at 30-32 times earnings, versus 40-plus for the large-cap. “That’s the real comparison," Varthak said.

The Nifty 50 is set to record a 10-day losing streak, which will mark the longest daily losing run in the last 29 years. The index and the 30-stock Sensex have fallen 16.2% and 15.4%, respectively, from the previous peak, triggering the worst fall since 2020.

Despite the severe correction, analysts at Kotak Securities do not find much value. Most parts of the market are expensive on an absolute or a historical basis. Only banks and non-banking finance companies are reasonably priced, while most stocks from the consumption, investment and IT sectors are trading at fair-to-full valuations. 

Nifty 50 valuations are misleading, given the wide disparity in valuations and a large share of profits of low P/E sectors, Kotak said. Investors should avoid buying narrative stocks on the assumption that they have become cheap, the brokerage said.

Despite attractive stock valuations, they alone won’t be enough to fuel a market recovery, according to Maneesh Dangi. "Valuations don’t have the muscle to lift markets,” the founder and chief executive officer of Macro Mosaic Investing told NDTV Profit.