Three In Four Nifty 50 Stocks Trade At A Discount To Historical Valuations

The one-year forward price-to-earnings multiple of the benchmark spiked as the markets rose the most in a decade. Nifty 50 now trades at a 16 percent premium to its 10-year average, according to Bloomberg data. But nearly three-fourths of the stocks in the index are trading at a discount to the historical valuation.

That’s because the index’s outperformance has been led by a handful of heavyweights, including HDFC Bank Ltd. and Housing Development Finance Corporation Ltd., Reliance Industries Ltd., ICICI Bank Ltd. and State Bank of India, among others.

Finance Minister Nirmala Sitharaman cut corporate taxes on domestic businesses last week to stimulate growth in Asia’s third-largest economy from a six-year low. That helped Nifty wipe out losses so far this year. Yet, factors like weak corporate earnings and geopolitical tensions—including disruptions in crude oil supply from Saudi Arabia and the U.S.-China trade war—weigh on company valuations.

Here are sector-wise valuations of Nifty 50:

Methodology

• Stock universe: Nifty 50
• 12-month forward price-to-equity multiple for all stocks barring financials and telecom companies.
• 12-month forward price-to-book multiple for financial companies.
• 12-month forward enterprise -to-Ebitda for telecom stocks and Ultratech Cement Ltd.

Metals

Metal stocks were the worst hit after major commodity producers reported weak quarterly earnings amid growing worries over slowing demand in India. The slowdown, coupled with weakness in the automobile sector globally, impacted valuations.

Pharma

The valuations of pharmaceutical companies—which were trading at a premium on the back of superior business profiles and margins due to exposure to the high-growth U.S. market—fell after the U.S. Food and Drug Administration initiated action against many firms for non-compliance with good manufacturing practices. Business conditions for the sector deteriorated following increased competition and pricing pressure in the market for generics in the U.S.

Oil & Gas

A reduction in marketing margin, no fuel price hikes during election periods, increased debt, overhang of stake sales and sharp movement in crude oil prices hurt Indian Oil Corporation Ltd. and Bharat Petroleum Corporation Ltd.—India’s largest state-run oil marketers.

Key concerns for Oil & Natural Gas Corporation Ltd. and GAIL India Ltd. were overhang of subsidy burden, stake sale by promoters, concerns around splitting of gas marketing and transmission businesses, weak global gas prices and lower-than-expected tariff hikes

Reliance Industries was the only company in the sector to not trade at a discount.

Automobiles

Automakers are in the midst of a gripping slowdown since last Diwali on the back of several factors like sluggish consumer demand, sharp jump in ownership cost following regulatory changes, a credit squeeze facing non-bank lenders and weaker exports.

Falling volumes forced companies to lay off contract workers and dealerships to shut showrooms. Consequently, auto sales dropped the most in 22 years in August.

However, Maruti Suzuki India Ltd. continues to trade at a premium to its long-term average despite correcting over a third from its peak.

Financials

As many as eight out of the 11 financial companies on the index—accounting for nearly 40 percent of Nifty’s weight—are trading at a discount to their 10-year average price-to-book ratio. Large private banks, non-bank lenders like Bajaj Finance Ltd. and state-run SBI with their significantly strong balance sheets and low risk of asset quality deterioration are trading at a discount to their historical average. The valuations of Yes Bank Ltd. and Indiabulls Housing Finance Ltd. have been impacted on alleged lapses over corporate governance.

Consumer Goods

Consumer goods makers continue to remain expensive despite volume growth easing in the quarter ended June as Indians are spending less on everything from biscuits to shampoos. That may have to do with the fact that the sector is considered safe during periods of uncertainty. Even as concerns persist over demand in the short term, analysts remain positive over long-term prospects of the sector. ITC is the only company in the sector to trade a discount because of its increased dependence on cigarette business.