Despite correction in the market, the value of equities remains high

Of the 890 firms listed on the BSE for which valuation data for the last five years were available, 551 (62%) are trading at a premium to their five-year average price-to-earnings (P/E) ratio. A mint analysis shows.

Domestic stocks hit their peak in October on strong global cues with the Sensex’s P/E multiples touching 31. Such expensive valuations left foreign investors stunned, prompting them to invest heavily 13,550 crore from Indian equities during the month. Overvalued stocks continue to dominate despite the 30-share Sensex falling nearly 6% since then.

Of the 551 stocks, more than a quarter are undervalued to the extent of 80% or more relative to the five-year P/E ratio. About 20% are hovering within the 25-50% range, while 38% of the stocks are trading at a premium of up to 25%.

Jitendra Upadhyay, Senior Equity Research Analyst, Bonanza Portfolio, said a key factor driving this is the improvement in economic activity during the first half of FY 2022, as all indicators have surpassed pre-pandemic levels. “Corporate earnings distribution also remains strong, and Q2FY22 earnings were above consensus estimates, led by strong growth in metals, oil and gas and PSU banks,” he added.

Surprisingly, the broader indices, including the headline index, are not valued as much. The Sensex is trading 8.3% higher than its five-year average P/E ratio of 27.3, but has reached its peak valuation in March. The P/E ratio of the BSE 500 index is just 2.7 per cent above its long term average, while mid-cap and small-cap indices are trading at a discount.

Even though most sectors reflected the broader trend, some managed to buck the trend. Many stocks in the banking sector and about 40% in drugs and pharmaceuticals are currently not expensive and are trading at a discount.

On the global front, India still remains a more valuable market than other emerging and developed markets on a 12-month forward basis.

“Equities saw a fall after reports of Omicron softening compared to Delta and eventually ignoring the more harsh tone of the US Fed,” Upadhyay said. “Moreover, better-than-expected GDP [data], GST collections, and strong manufacturing PMI numbers also contributed to the enthusiasm.”

Markets are restless amid rising inflation concerns amid easing impact of concerns over Omicron. Equities continue to remain under pressure as foreign portfolio investors have already exited 8,385 crore so far in December as compared to outflow of Rs. 5,945 crore last month. Investors will be watching the policy outcome of major central bank meetings this week, including the US Federal Reserve and the European Central Bank.