Equity market reasonably valued; sentiment upbeat, not euphoric: Gautam Duggad, Head of Research, Motilal Oswal Financial Services

Equity market reasonably valued; sentiment upbeat, not euphoric: Gautam Duggad, Head of Research, Motilal Oswal Financial Services

Benchmark indices may be at record high levels, but the sentiment can be described as upbeat and not euphoric as is usually the case when the markets are at all-time highs, said Gautam Duggad, Head of Research at Motilal Oswal Financial Services, in an interview to Moneycontrol.

Duggad said that the rally was justified, considering the economic activity and the growth in corporate earnings.

Three years ago in FY20, the aggregate earnings of NSE 500 corporates stood at Rs 4.5 lakh crore. This has moved up to Rs 11.1 lakh crore in FY23, he said.

He also highlighted that despite the recent rally, the Indian equity market has underperformed other global markets, such as the United States, Japan, and some markets in Europe.

Even in terms of returns, the smallcap index has given an abysmal 7 percent compounded annual growth rate (CAGR) over a period of five to six years, and the returns on the midcap index remain modest at 11-12 percent.
In terms of valuations, Nifty is still trading in line with its long-term averages after 18 months of correction.. The midcap index is at a marginal premium of 10-15 percent and smallcap index is still at a discount.

Explaining the valuations, he said, “At the time of Nifty hitting 18,400 in October 2021, the valuations were 21.5 times one-year forward. Today, when the levels are around the 19,000-19,500 range, valuations are at 18.5 to 19.5 times. He expects the valuation to further slide to 17.5 to 18 times one-year forward FY25 earnings.

Sentiment will turn euphoric when the price-to-earnings (PE) ratio crosses 23, 24, 25 times, which still remains some distance away.

On earnings, which will commence for the quarter ended June 30, Tata Consultancy Services (TCS) and HCL Technologies will report (June Quarter) numbers.

Q1 earnings expectations from IT sector

Motilal Oswal Financial Services expects a muted first quarter (Q1) for the Information Technology (IT) sector but at the same time expects management commentary on demand, specifically discretionary demand, and new order books or wins in the second quarter (Q2) and third quarter (Q3) of FY24 to provide direction to the otherwise dull sector.

The brokerage expects Q1 to be challenging for the sector, particularly in sequential dollar revenue growth. However, it expects year-on-year (YoY) profit growth to appear robust due to the low base of margins.

Having said that, the brokerage is more optimistic about IT stocks now than about three to six months ago, considering these companies generate high cash flows and provide huge payouts.