Nifty valuation fair, risk-reward favourable, says HDFC Securities; lists key changes in model portfolio
The Nifty 50 index is now trading at 20.3x FY24 and ~17.6x FY25 consensus EPS. Valuations look fair now on an FY25 basis and risk-reward is balanced, said HDFC. Its preferred sectors are large-cap banks, industrial and real estate, power, autos, pharma, OMCs, gas, and capital markets.
The September-quarter (Q2FY24) earnings season saw an overall in-line performance, however, wide divergences were seen across sectors and companies.
In a recent report, brokerage house HDFC Securities noted that the key theme of the quarter was the continuation of input cost deflation, which helped companies improve their profitability in-spite of muted YoY revenue growth. It believes this benefit of commodity cost deflation is largely over and now future earnings growths have to be volume-led.
The brokerage further informed that large-cap stocks of the coverage universe dominated the incremental earnings, which grew by 37 percent YoY, while the midcap category grew by just 12 percent YoY. Further, 88 percent of incremental YoY earnings growth came from only three sectors—energy (56 percent), auto (16 percent) and lending financials (16 percent)—reflecting heavy lifting by these sectors, noted HDFC. Strong YoY earnings growth was seen in auto, lending financials, industrials, real estate, energy, cement and pharma sectors, whereas, staples, metals, chemicals, IT and consumer discretionary sectors disappointed, added the brokerage.
"For the HSIE coverage universe, projected earnings growth for FY24E and FY25E stands at 29.2 percent and 7.5 percent respectively, factoring in continued margin recovery and demand momentum. FY23 was an exceptionally subdued earnings year for the energy sector due to the freeze on petrol and diesel retail prices impacting OMCs and windfall tax hurting upstream. So, excluding the energy sector, earnings growth for the coverage universe for FY24E and FY25E stood at 18.8 percent and 15.5 percent respectively," it noted.
Read here: Q2 earnings review: Topline growth slows further, margins improve
Outlook
The valuations of the Nifty 50 index are more reasonable at 17.5X FY2025E EPS in the context of moderate earnings growth, said the brokerage.
Key factors to monitor in H2FY24 for Indian markets include weather conditions especially the development of El Nino, leading to an unusual rise in rural stress; worsening geopolitical situation in Europe and Asia; some large Lehman-like credit events causing a market-wide selloff; a hard landing in the US economy; sharp rise in credit cost for lenders in India; inflation remaining sticky at high levels; and the 2024 general elections, highlighted HDFC.
It further stated that the earnings momentum in India may slow as export demand and rural demand conditions remain uncertain. The present forward valuations are close to long-term averages based on still marginally optimistic earnings forecasts. A slight PE derating is also probable in H2FY24, but any major negative surprise is not likely. Market cap to GDP ratio for India is high at the moment -109 vs 18-year average of 80 and 113 in FY22, it stated.
Read here: IT Sector review: Axis lists top hits and misses in Q2; picks 3 top stocks
Investors need not be complacent and should do an asset allocation review to cut back excess allocation to equities. Also within equities, they need to do a portfolio review to weed out non-performers and take part in profits in stocks that have run more than deserving. This will enable them to raise some cash which can be deployed later in weak times, advised the brokerage.
Valuation & model portfolio
The Nifty 50 index is now trading at 20.3x FY24 and ~17.6x FY25 consensus EPS. Valuations look fair now on an FY25 basis and risk-reward is balanced, said HDFC.
Its preferred sectors are large-cap banks, industrial and real estate, power, autos, pharma, OMCs, gas, and capital markets. Meanwhile, it remains underweight on consumer (staples and discretionary), metals, chemicals, and small banks.
Model portfolio: Key changes in the model portfolio are as below:
Catch all the Business News , Market News , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
- Top Gainers
- Top Losers
- 52 Week High