Nifty companies are trading at a premium to their historic valuation

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After hitting a lifetime of 18,604.45 on October 19, 2021, Nifty correct almost 1,000 points in just ten days to hit a low of 17,613 on October 19, 2021. The increase in volatility was on the back of weak global cues, stretched valuations, and FIIs turning net sellers. FII outflows of $2.3 billion were seen after two consecutive months of inflows. DIIs saw inflows for the eighth consecutive month of $ 0.6 billion. However, since the beginning of November, there has been some up move in the index as it witnessed a pullback rally is hovering at the 18,000 levels.

Even the Q2FY22 earnings season has thus far been above estimates, benefitting from strong growth in the technology sector, steady recovery in loan growth, as well as recovery and an upgrade in the asset quality of most private sector banks, higher commodity prices and volume growth in the Energy and Metals sectors, and the economic, unlock driving growth in Consumer and Retail. “Nifty profits for the 34 companies that have posted their results have grown 22% YoY (v/s exp. of 13% growth),” stated Motilal Oswal in its monthly Bulls & Bears report.

Macros & micros

The country saw the third consecutive year of normal monsoons, with the southwest monsoon season-ending 0.7% short of the long-period average. Macroeconomic trends saw a good recovery, with high-frequency indicators (GST collections, e-way bills, PMI readings, and fuel demand) improving month on month. Exports have emerged as a growth engine – India reported more than $ 100 billion worth of exports in Q2FY22, the highest ever in a single quarter. Non-oil, non-gold imports grew 40% YoY to $ 88.7 billion in Q2FY22, indicating strong domestic demand.

“The normal monsoon season is likely to further spur rural demand, and with the government balance sheet in good stead, the government to press the fiscal pedal to drive growth in 2HFY22,” the report added.

Valuations trend

According to Motilal Oswal the Nifty trades at 12-month forward P/E (price to earnings ratio) of 21.7x, at a 14% premium to its LPA. While the 12-month trailing P/E for the Nifty at 27.1x is at a 31% premium to its LPA of 20.6x.

Similarly, Nifty’s P/B (price to book ratio) at 3.3x is at a 29% premium to its historical average. At 3.7x, Nifty’s 12-month trailing P/B is above its historical average of 2.8x.

Even India’s market capitalisation-to-GDP ratio has been volatile, reaching 56% (FY20 GDP) in Mar’20 from 80% in FY19. It has rebounded to 115% presently (FY22E GDP) – above its long-term average of 79%

Premium valuations

According to an analysis of 10-year P/E data 64% or 32 constituents of Nifty 50 are trading at a significant premium to their historical averages. While 18 companies of 36% of Nifty 50 companies are trading at a discount to their historical averages.