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Are Indian Markets Overstretched?

By Puneet Wadhwa
February 27, 2024 16:13 IST
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The index is currently trading at 149 per cent of its historical P/B valuation, surpassing its previous peak of 125 per cent made in 2020-21.

Illustration: Dominic Xavier/

Indian equity markets, including the National Stock Exchange Nifty 50, Nifty Midcap 100, and Nifty Smallcap 100, are overvalued at current levels, trading much higher than their historical valuations, according to analysts.

As of January 2024, the latest price-to-book (P/B) valuation for the Nifty 50, according to research analysts Varun Lohchab and Amit Kumar of HDFC Securities Institutional Research, was 114 per cent of the average historical valuation, indicating expensiveness.

When this ratio crossed 100 and touched 103 per cent in 2021-2022, the index declined by 1.8 per cent in the subsequent financial year, 2022-2023.

'The Nifty Midcap 100 is currently trading at 122 per cent of its historical P/B valuation. The previous peak was in 2014-2015 (FY15) at 129 per cent, after which the index declined by 4.2 per cent in the subsequent financial year (2015-2016),' said the HDFC Securities note.

'Sixty-seven per cent of the constituent stocks of the index trade above their historical valuations, surpassing the previous peak of 49 per cent in FY15,' the HDFC Securities note added.

Similarly, the Nifty Smallcap 100 is trading at a P/B of 6.7, the highest since 2012-2013.

According to their estimates, the index is currently trading at 149 per cent of its historical P/B valuation, surpassing its previous peak of 125 per cent made in 2020-2021.

Seventy per cent of the index constituents are trading at a premium to their historical valuations.

'Dangerous obsession'

In the past year, the midcap and smallcap indices have surged, rallying over 60 per cent each on the NSE compared to around a 23 per cent rise in the Nifty50.

Realty, CPSE, Energy, Auto, Oil & Gas, and pharmaceutical sectors on the NSE have been among the key performers during this period, surging 55 per cent to 119 per cent, according to data.

Kotak Securities also believes that the general euphoria on the Street has resulted in a 'dangerous obsession' with superficial narratives at the expense of fundamentals.

The market, analysts argue, is happy to overpay for weak business models and superficial narratives without due consideration to fundamentals, risks, and valuations.

Among the larger sectors, the financial sector is the only exception, with most stocks trading at reasonable valuations.

Modest return

That said, in the past decade, this level of overvaluation in midcap and smallcap indices has not always resulted in a sharp index correction in the subsequent one-two years, HDFC Securities notes, but it leads to a subdued/modest return in the next few years, and the rally tends to get less broad-based.

'It's time for investors to get more selective and bottom-up across all market capitalisation indices as the phase of easy and broad-based returns might not repeat in 2024-2025 through 2025-26,' wrote Lohchab and Kumar in a recent note.

Kotak Securities, meanwhile, does not expect a sharp correction in the markets just yet, and the large 'disconnect' between price and value may sustain, notwithstanding the rich valuations across sectors and stocks.

This, they believe, could be possible if the Bharatiya Janata Party were to win the Lok Sabha elections in 2024, and the market was to continue ignoring potential medium-term disruption risks.

'India's reasonable macroeconomic situation, possible weak monsoons from El Nino conditions may further postpone consumption and rural recovery. A sluggish global outlook (lower inflation and interest rates), however, should provide some tailwind for the market,' wrote Sanjeev Prasad, co-head, Kotak Institutional Equities, in a recent note co-authored with Anindya Bhowmik and Sunita Baldawa.

In terms of stocks, Kotak Mahindra Bank, Bandhan Bank, Crompton Greaves Consumer Electricals, Aurobindo Pharma, and City Union Bank are the top buy ideas of analysts at HDFC Securities.

'On the other hand, stocks that are most stretched versus historical valuations and negative views of analysts are Tata Motors, Nestle India, Titan Company, and Britannia,' Lohchab and Kumar wrote.

Graphic source: HDFC Securities, Institutional Research

Feature Presentation: Aslam Hunani/

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