Graphic: Mint
Graphic: Mint

Are valuations of large-caps reasonable post the mayhem?

Following the recent selloff in the markets, some brokerage firms point out that not only stock prices but valuations of select blue-chip shares have reached reasonable levels

A key concern for investors in Indian equities has been uncomfortably high valuations of stocks. However, following the recent carnage, some brokerage firms point out that not only stock prices but valuations of select blue-chip shares have reached reasonable levels. For instance, in a report dated 8 October, Kotak Institutional Equities said that it finds the reward-risk balance reasonably attractive for large parts of the Indian market post the recent sharp correction in most sectors and stocks.

As the table shows, one-year forward price to earnings (P-E) estimates for Nifty 50 stocks have moderated from their earlier levels. Also, their EPS (earnings per share) estimates have been revised higher.

Since EPS growth looks promising, they are poised to give handsome returns in the next one year. In fact, Kotak anticipates the Nifty 50 index to post 15% returns and these stocks are likely to outperform the benchmark index.

However, if one looks at P-E to growth ratio for some of these stocks such as ITC Ltd and Adani Ports and Special Economic Zone Ltd, valuations there still have some way to go before they become reasonable.

Meanwhile, it should be noted that overall, the Indian market is still trading at an expensive valuation compared to emerging market peers.

“Nonetheless, the Indian market may face turbulence over the next 2-3 quarters with stock prices being dictated by unfavourable global macro, weak domestic macro, government actions and uncertain politics rather than the underlying fundamentals and fair values of stocks," the Kotak report cautioned.

Close