India's Bullish Sentiment At 20-Month High, Valuations May Soon Overextend: CLSA
The brokerage expects Indian companies to deliver best two-year earnings growth among global peers.
India's equity valuations may soon be "overextended" as the bullish investor sentiment is at a 20-month high, according to CLSA.
India Bull-Bear Investor Sentiment Index is now at 96% bullish reading, changing from the extreme bearish 8.2% in just three months, according to CLSA's July 6 note. Still, the valuations are not yet at the warning level, it said.
While Nifty earnings per share estimates were cut by 1.0% and 1.4% for FY24 and FY25, respectively, CLSA expects Indian companies to deliver best two-year earnings growth among global peers. "Limiting further cuts in the upcoming earnings season will be important."
The Nifty 50 was the fourth best performing market in the world during the April-June quarter. It rallied 10.5% and outperformed emerging market and Asia, ex-Japan.
Nifty's stellar performance took its 12-month forward price-to-earnings multiple from 17.4x at the start of the quarter to 18.6x, a 17.7% premium to it average. "Only about 17% of the trading days since 2005, the Nifty has been more expensive than the current PE."
Taiwan, the U.S. and South Korea are at more extended valuations than India, considering their respective historical trading ranges, CLSA said.
Still, the difference of 1.7 percentage points between India’s 10-year yield and 12-month forward consensus earnings is below the danger zone of 2.0 points. Equity valuations versus debt are much more extended in the U.S., France and the U.K., it said.
Mid And Small Caps Outperform
Realty, auto and telecom were the top performing sectors in April-June. Small- and mid-cap indices beat Nifty 50, generating returns that are 10 and 8.5 percentage points higher, respectively. About 60% of the Nifty’s constituents outperformed the benchmark, led by Tata Motors Ltd., Adani Enterprise Ltd. and HDFC Life Insurance Ltd. Only Infosys Ltd. and UPL Ltd. fell among Nifty constituents.
CLSA's Key Bets
CLSA's India focus portfolio outperformed the Nifty, led by DLF Ltd, IndusInd Bank Ltd. and Eicher Motors Ltd., while Gail Ltd., Hindalco Industries Ltd. and Bharat Petroleum Corp. were the laggards.
"Our portfolio has outperformed the Nifty in all 10 quarters since inception in Jan 2021 and delivered a total return of 113%, outperforming the Nifty 71.5 ppts," CLSA said.
The brokerage is overweight on banks, insurance, energy and real estate, while information and technology, staples and discretionary ex-autos are the top underweights. "Our portfolio favours value companies, given the ongoing tactical rally."
