Many Nifty50 constituents trade at a discount to their historical average; check names here

The Indian benchmark equity index Nifty is trading at a valuation lower than its historical average, while many of the index heavyweights, including HDFC Bank, Axis Bank, SBI, Maruti Suzuki, Tata Steel and Mahindra & Mahindra (M&M), are also trading at a discount to their 10-year average valuations, as per a report by domestic brokerage house Motilal Oswal.

The Nifty is trading at a 12-month forward P/E ratio of 18.6x, below its long-period average (LPA) of 20x, while the P/B ratio, at 2.9x, is at an 8% premium to its historical average.  

The 12-month trailing P/E for the Nifty, at 22.2x, is near to its LPA of 21.8x and at 3.3x, the 12-month trailing P/B ratio for the Nifty is above its historical average of 3x, the report highlighted.

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The report comes when the benchmark Nifty is trading just around 300 points below its life-time high of 18,887.60. The index has gained 4.8% in the last three months led by persistent foreign capital inflows, better than estimated corporate earnings for the March quarter and improving domestic macroeconomic scenario.

Inflows from foreign portfolio investors (FPI) in the Indian equities remained robust as they purchased equities worth ₹41,206.76 crore in the month of May.

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Over the last twelve months, the MSCI India index was up 7% and has outperformed the MSCI EM index that was down 11%. Over the last 10 years, it has outperformed the MSCI EM index by 173%, the Motilal Oswal report said. 

In P/E terms, the MSCI India index is trading at a 100% premium to the MSCI EM index, above its historical average of 70%, it noted.

Meanwhile, Nifty companies trading at a significant premium to their historical average include Divi’s Laboratories (+51%), Grasim Industries (+47%), Reliance Industries (+45%), Nestle (+24%), and Tech Mahindra (+23%).  

Whereas, companies trading at a significant discount to their historical average include ONGC (-56%), Tata Steel (-52%), Coal India (-33%), Apollo Hospital (-29%), and Dr Reddy’s Laboratories (-28%).

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The Auto sector is trading at a P/E of 21.1x, below its 10-year historical average of 26.5x, while on a P/B basis, it is trading at a 13% premium to its 10-year average of 3.3x. “We believe 2W volume should continue to see sequential growth, led by a recovery in rural demand and a pickup in exports,” Motilal Oswal said.

The consumer sector’s P/E ratio, at 42.3x, represents a 6% premium to its 10-year average of 39.7x. On a P/B basis, it is trading at 11.4x, a premium of 12% against its historical average of 10.2x. 

“Management commentary suggests that demand is recovering in rural markets. Unseasonal rainfall has affected beverages demand in some parts of the country. Companies have started to pass on the benefits of lower commodity costs to consumers,” the brokerage added.

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The PSU Banks sector is trading at a P/B ratio of 1.0x, a 20% premium to its historical average of 0.8x. The Private Banks sector is trading at a P/B ratio of 2.5x, its 10-year average. ROE is at a 10-year high of 16% for private banks.

“Earnings for PSU Banks remained healthy, led by a broad-based improvement in key parameters, such as margin, operating profitability, and credit cost. Improving profitability and a reduction in risk-weight intensity have further boosted capital ratios for PSU banks,” it added.

With the Reserve Bank of India (RBI) keeping policy rates unchanged, the brokerage house believes systemic interest rates have likely peaked. However, garnering deposits will be important. The rise in deposit costs (due to lag in re-pricing), along with a pause in rate hikes may keep margin under pressure in FY24, it said.