Gautam Duggad plays down 20K euphoria, says Nifty rally driven by fundamentals only

Gautam Duggad - Motilal Oswal

Gautam Duggad, Head of Research at Motilal Oswal Institutional Equities, believes that the bull run on Dalal Street that charged Nifty 50 to hit a record 20,000 points on September 11 and continued to witness high levels at the open today is driven purely by fundamentals .

"I don't think any rally in the market is not backed by fundamentals. This is a purely fundamentals-driven rally," he told Moneycontrol.

"If we assume that the same multiples continue for FY25, we are basically talking somewhere about 22,500 to 23,000 kind of fundamental level for Nifty," Duggad said on the likely levels of where the market is headed from here.

Read: With Nifty at 20k, this sector enjoys maximum bullishness; Stocks to sustain gains

"All said and done, you know, there's a lot of hue and cry about 20,000. Ultimately, it's just a number and a small milestone. If you look at the last 5-10-year returns from the market or at the last 10-year CAGR of Nifty or even 5-year CAGR, we have hardly compounded at 10-12 percent or rather 12 percent on a 10-year basis," he said, playing down the euphoria on the Street.

"As of yesterday's (September 11) closing, Nifty's 10-year CAGR is 13 percent, 5-year CAGR is 12 percent, and in the last 1 year, we have given 12 percent returns. So, this is not some unusual returns which have happened. It's just because the number is 20,000 that one is getting carried away. End of the day, percentage compounding returns are very modest, at 12-13 percent, whether it is 1 year, 5 years, or 10 years. I'm deliberately not taking the 3-year number because that was the time when we came out of the Covid bottom. Hence, 3- year CAGR for Nifty is 20 percent."

However, he also added that when it comes to mid caps and small caps which have seen gains of more than 25 percent on year to date basis have obviously overheated- which is always the case in bull market.

On being asked on the likely correction in stocks which will creep in on account of fundamentals not exactly matching the valuation that companies are demanding, the market analyst said that power, defence, capital goods, construction and infrastructure sectors also are demanding higher valuations and are expensive compared to their historical valuations. These companies had a combined market cap of Rs 7 lakh crore in July 2020, which is exactly three years back. Today, their market cap is Rs 23 lakh crore.

He also pointed that things have materially changed for the sectors- in terms of government’s emphasis on indigenization, Make in India, PLI, the big capex and infra thrust, the big push towards renewables amongst other things.

"So, clearly a lot of the distance has been covered as far as valuations are concerned. Valuations are no longer cheap today. They're expensive vis-à-vis their own historical averages, as well as in absolute tasks. But is it all froth? Is it all euphoria and speculation?" he argued.

"I would say no. There is also an underlying element of fundamental improvement in their balance sheet, growth and earnings."

Duggad said that risk-reward is very attractive in financials, especially for largecap banks, whether PSU or private. He added that valuations of these industries have corrected a whole lot in the last three or four year because the underlying market cap has not kept pace with the underlying earnings growth. So stocks, which used to trade at four times, three times, two-and-a-half times price-to-book are now trading at 35 percent lower price-to-book multiples.

"Largecap IT looks quite attractive to me... Risk-reward is very attractive in my view, because the valuations have corrected. Do remember that in CY22, The NSE IT index was down 28 percent. While the market is at a new high, largecap IT stocks are still down 20-30 percent from their December 2021 highs. For example, Infosys was a Rs 1,900 stock two years back." Infosys shares are currently trading at Rs 1,495 apiece.

The Sensex and Nifty on September 12 surrendered their early gains, led by losses in energy, metals and auto stocks, while investors turned their focus to retail inflation data for August due later in the day.

The Nifty 50 index was down 0.29 percent at 19,939.95 by 10:35am IST, while the S&P BSE Sensex fell 0.16 percent to 67,020.

Both the benchmarks had risen over 0.5 percent each early in the session, with the Nifty hitting a fresh record high for a second straight session before selling pressure emerged at record-high levels.