The decline in the domestic stock market in 2022 so far appears to have shepherded it into a zone of reasonableness, with valuations of individual stocks significantly lowered.
Nifty 50 stocks on average have fallen more than 22 percent from their recent highs. The price drop has made their valuations reasonable, with Nifty 50 stocks now trading 20 percent below the average of price targets set by analysts, Bloomberg data showed.
“Market valuations appear more reasonable versus recent history after the sharp correction over the past two months,” Kotak Institutional Equities said in a recent note. “The gap between earnings yield and bond yield has also narrowed despite the recent increase in bond yields.”
Investors with a more optimistic disposition could contend that the average Nifty 50 stock currently offers an upside of 26 percent over their fair value, which is the average of their price targets.
The argument is strengthened by the fact that the earnings per share estimate for Nifty 50 companies has been modestly upgraded over the past two months, suggesting that investors remain bullish on earnings growth potential.
Optimistic outlook
“The correction in the local markets was not due to domestic factors but global problems,” said Mitul Shah, head of research at Reliance Securities. “GST data coming better than expected, the fiscal deficit and inflation under pressure, but the government and the Reserve Bank of India are working together… We expect the markets to perform well in the second half of this year and this is driving optimism.”
Among the Nifty 50 index companies, Hindalco Industries dropped 36 percent from its 52-week high. An analyst poll by Bloomberg expects an upside of over 65 percent in the next 12 months from its current price.
Apollo Hospitals Enterprise, which fell 42 percent from its one-year high and has declined over 31 percent so far this year, has a potential upside of 62 percent in the next one year.
Tata Steel, Bharat Petroleum Corp and Oil & Natural Gas Corp are expected to increase over 45 percent each in the next 12 month. The three stocks are almost 30 percent lower than their 52-week highs.
Deepak Jasani, head of retail research at HDFC Securities, said that during periods of weak market sentiment or uncertainty over earnings growth, analysts take time to cut EPS estimates or other valuation parameters.
Analysts remain hopeful of an early resolution of issues, Jasani added. They await hard earnings data to corroborate a trend of weak performance. Underperformance over more than two or three quarters could trigger downward target revisions.
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