Premium Valuations No Bar For Nifty 50 As Index Tops 13,000
The 50-stock index is currently trading at a one-year forward price-to-earnings multiple of 26.6 times.
India’s Nifty 50 surpassed the 13,000-mark for the first time as investors looked past the gauge’s premium valuation, betting on better business prospects as indicated by companies after the second quarter and a quicker-than-expected economic recovery.
The 50-stock index is currently trading at a one-year forward price-to-earnings multiple of 26.6 times, according to Bloomberg data. That compares with its 10-year average of 17.3 times. The Nifty 50 is also trading two standard deviations above its historical average.
India’s benchmarks tracked their global peers in the worst selloff in more than a decade, tumbling 40% from the peak in January to their March-low, after the nation imposed one of the world’s harshest lockdowns to contain the coronavirus. But they have since erased losses, riding on the optimism stemming from the fiscal and monetary stimulus announced by the government and central bank, a faster-than-expected pickup in economic activities after lockdown curbs were eased, robust foreign flows and a potential Covid-19 vaccine.
Nifty At 13,000... Now What?
The rally even prompted global financial services providers to raise their targets for Indian equities. Goldman Sachs upgraded India’s rating to ‘overweight’ and revised its target for Nifty to 14,100 by the end of 2021. Nomura expects the Nifty to touch 13,640 by December 2021. Morgan Stanley hiked its target for the Sensex to 50,000 by the end of next year, citing that “the coming growth cycle is not fully priced in”.
“(A large) part of the market optimism is fuelled by a better-than-expected Q2 FY21, wherein maximum companies benefitted from low raw material costs and realised operating leverage benefits, with positive management commentary on demand prospects and retaining some part of operating leverage gains in the post Covid world,” said Pankaj Pandey, head (research) at ICICI Securities Ltd.
According to Gautam Duggad, head of research at Motilal Oswal Securities Ltd., valuations are reflecting a recovery from the second half of FY21, leaving a limited margin for safety for any negative surprises. “Hence, we prefer companies with a higher visibility in terms of a demand recovery (higher rural exposure); a strong competitive positioning; margin drivers; and balance sheet strength.”
Here’s a look at how valuations of some of the stocks in the Nifty 50 fared: