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Apr 06, 2017 10:51 AM IST | Source: CNBC-TV18

Nifty 9K to 9K, what's changed this time? Valuations, says Motilal Oswal

Liquidity backdrop is very strong from both FIIs and DIIs along with macro backdrop especially after state election results, and if earnings pick up then definitely there is more legs to this rally.

The Nifty has traversed a full circle in two years — from 9,000 in March 2015 back to levels beyond 9,000 in March 2017. But, there is one thing which has changed is the valuations which are no longer benign, Gautam Duggad, Hd-Research, Instl Equities, Motilal Oswal Securities said in an interview with CNBC-TV18.

Valuations for the Nifty based on both one-year forward earnings and on trailing earnings are rich but at similar levels to March 2015. “When the Nifty scaled 9k in March 2015, the 12- month forward P/E was 17.4x. Today, the 12-month forward P/E (based on March 2018E EPS) is 18.1x,” said Duggad.

He further added that we at MOSL are currently projecting a 23 percent earnings growth for the Nifty in FY18. Some of the sectors which could turn out to be leaders in earnings growth include autos, private banks, cement and some section of consumer stocks, he said.

The entry level valuations today of 18-18.5x with an underlying assumption of 20 percent earnings growth and if earnings growth comes out at 10 percent in that case forward PE could become 20x. Hence, returns from here on will not be that easy, explains Duggad.

Liquidity backdrop is very strong from both foreign institutional investors and domestic institutional investors (DIIs) along with macro backdrop especially after state election results, and if earnings pick up then definitely there is more legs to this rally.

Sectors in Leadership Position

Sectors which will lead earnings growth include sectors like autos, private banks as well as PSU banks, oil & gas, cement and to certain extent metals. Whereas pharma, utility, IT, pharma and consumer might report subdued growth.

“We are almost in the midst of fourth quarter preview. I think we will see a repeat of what happened in the December quarter in which 2-3 sectors drive entire delta,” said Duggad.

Capital Goods

Capital Goods sector which trades at a 26 per cent discount to historical P/B average and slightly above its historical P/E average is unlikely to deliver any surprise.

One has to take a very stock specific approach. The public spending has been good but private spending has lagged. “We have not seen any meaningful private sector capex recovery in the next 12-18 months even where the capacity utilisation currently lags,” said Duggad.

Cautious on Midcap stocks

The valuation premium for midcaps has expanded on a month-on-month basis for the last three months. The valuation premium of a midcap is somewhere close to 19 percent when compared to largecaps. It was around 10 percent two months back.

“Midcap valuations have inflated at a much faster pace in the last two-three months and that in a way is a function of liquidity flows. DIIs flows in the last 2 years has been almost $16 billion which clearly drove the rally in midcap stocks,” said Duggad.

“I will be very cautious in the midcap space. There is very little precedence in the past where this kind of valuations has sustained for far too long,” he said.
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