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Mumbai: Despite the correction in share markets in recent weeks, nearly two in three stocks listed on BSE are still trading at valuations higher than their long-term averages, raising concern that the trail of an overheated market is here to stay.

Out of 890 BSE-listed firms for which valuations data was available for the last five years, as many as 551 (62%) are trading at a premium to their five-year median price-to-earnings (P/E) ratios, a Mint analysis shows.

Domestic equities rose to their peak levels in October on strong global cues with P/E multiples touching 31 for the Sensex. Such expensive valuations spooked foreign investors, prompting them to pull a whopping 13,550 crore from Indian equities during the month. The dominance of overvalued stocks is despite a near-6% decline in the 30-share Sensex since then.

Out of the 551 stocks, more than a quarter are overvalued to the extent of 80% or more compared with the five-year P/E ratio. Around 20% are hovering within the range of 25-50%, while 38% stocks are trading at premiums of up to 25%.

One major factor driving this is the rebound in economic activity during the first half of the fiscal year 2022, as all indicators surpassed pre-pandemic levels, said Jitendra Upadhyay, senior equity research analyst at Bonanza Portfolio. “Corporate earnings delivery continues to remain robust too, and Q2FY22 earnings were above consensus estimates, led by strong growth in metals, oil and gas, and PSU banks," he said.

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Surprisingly, the broader indices, including the headline index, aren’t that richly valued. The Sensex is trading 8.3% higher than its five-year median P/E ratio of 27.3, but is at a discount to its peak valuations reached in March. The P/E ratio of the BSE 500 index is just 2.7% above its long-term average, while the mid-cap and small-cap indices are trading at a significant discount.

Even though most sectors mirrored the broader trend, some managed to buck the trend. Many stocks in the banking sector and nearly 40% scrips in drugs and pharmaceuticals are currently not expensive and are trading at discounts.

On the global front, India still remains an overvalued market on a 12-month forward basis, compared with other emerging and developed markets.

“Equities witnessed a pullback as news came in of Omicron being milder than Delta and eventually ignored the more hawkish tone of US Fed," Upadhyay said. “In addition, better-than-expected GDP [data], GST collections, and strong manufacturing PMI numbers also contributed to the cheer."

Growing inflation worries amid fading impact of Omicron-related concerns are keeping the markets jittery. Equities continue to remain under pressure with foreign portfolio investors already pulling out 8,385 crore in December so far compared to an outflow of 5,945 crore last month. The policy outcome of key central bank meetings this week, including the US Federal Reserve and European Central Bank, will be keenly monitored by the investors.

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