BackSensex, Nifty valuations fall below five-year average
Decline in valuation of Sensex, Nifty is giving medium-term investors an opportunity to re-enter the market
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Mumbai: Falling prices and expectations of improved corporate earnings in the current financial year are making valuations of Indian stocks look attractive, although investor sentiment towards equities appears to have soured.
The BSE Sensex has fallen 11% from its record high of 30,024 points on 4 March, and is down 1.8% for the year to date. On Thursday, the Sensex closed at 27,011.31, down 0.8% for the day.
The National Stock Exchange’s Nifty, too, has fallen 11% from its peak of 9,119 to 8,181.50 on Thursday.
A row between the government and foreign investors over the levy of minimum alternate tax (MAT) on capital gains, investor worries about poor corporate earnings in the quarter ended March, a forecast of sub-part monsoon rainfall, an increase in crude oil prices and a weaker rupee have conspired to pull down share prices.
As prices have fallen, the valuation of India’s benchmark indices have slipped below their five-year average, giving medium-term investors an opportunity to re-enter the market.
According to Bloomberg data, the 30-share Sensex is trading at 15.22 times one-year forward price-to-earnings (P/E) multiple, compared with its five-year average of 15.65 times. The 50-share Nifty is trading at 15.43 times one-year forward P/E, compared with the five-year average of 15.5 times.
“If you look at it from a medium-term perspective, valuations are reasonable. But in the near term, the way money is flowing out, we expect the Nifty will fall below 8,000, and currency is also playing a spoilsport," said Amar Ambani, head of research at IIFL Holdings Ltd.
“It is a great time to accumulate. Even if an investor has a six-month horizon, I think he would make money," added Ambani.
To be sure, while the recent slide in stock prices is one reason for valuations starting to look more reasonable, the expectation of an improvement in earnings in the year to next March has also played a role as the P/E ratio takes into account the earnings projected for the next four quarters.
“Overall market valuations now look more reasonable, but this is largely contingent on earnings holding up during the course of the year. We are now more confident that the worst of the earnings downgrades is largely done with, although we expect downgrades to earnings of the cement and industrial sectors," Kotak Institutional Equities said in a 27 April report.
Others agree that fundamentally the market looks like a “buy", although they don’t rule out more selling pressure in the near term.
“Fundamentally, it is the right time for buying. The problem is completely technical in nature. The market is falling because people are exiting. However, technically we will see a bounce-back in May, as the market is in oversold space," said Deven Choksey, managing director and chief executive officer of KR Choksey Shares and Securities Pvt. Ltd.
Foreign institutional investors (FIIs) have sold a net $1.1 billion of equities in nine out of the 10 previous trading sessions. The selling is being blamed on a tax dispute over the imposition of MAT, a tax paid by profit-making companies that do not pay corporate tax on account of incentives and exemptions. Such companies pay a fixed proportion of their book profit as MAT.
“Crude oil and currency—both of them—are causing nervousness in portfolios of FIIs. They (government) have mismanaged the MAT issue and are handicapped with the land acquisition bill," added Choksey.
While the tax department has issued demands to 68 FIIs for payment of dues totalling ₹ 608.83 crore, the total amount is expected to cross ₹ 40,000 crore, Mint reported on 27 April.
Five such foreign portfolio investors (FPIs) have filed a writ petition in the Bombay high court against the income tax department, challenging the notices issued by the latter regarding the payment of MAT. The court will hear the case on 6 May.
The rupee has shed 0.62% since the start of the year and slipped to ₹ 63.42 against the dollar—a four-month low. Brent crude prices have risen 14.8% since the start of the year to around $66 per barrel. Both have undermined investor sentiment towards equities.
Given the recent fall, Ambani of IIFL says he would consider investing in financial, pharmaceutical and auto companies. He prefers to stay away from cement, telecom, packaged consumer goods and metals for now.
“I would go for financials. The rally, if any, in the stock market is on hopes that the economy will recover. If we go with that assumption, banking and financials will be main beneficiaries," said Ambani.
“PSU (public sector undertaking) banks, we are not gung-ho about them. Asset quality will take long to recover," added Ambani.
Kotak Institutional Equities, in the report cited above, said that some individual stocks had corrected due to short-term factors, and investors can consider buying such stocks.
“Some good-quality growth stocks in the automobiles and IT (information technology) sectors offer reasonable valuations now and we would look at accumulating these stocks at current levels," Kotak analysts Sanjeev Prasad, Akhilesh Tilotia, and Sunita Baldawa wrote in the note.
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