Nifty at all-time high but not on valuations: Motilal Oswal

Nifty is trading at a 12-month forward P/E (price to earnings) of 18.8x, a 7 percent discount to its own long-period average

While equity benchmark Nifty soars to new highs, it is still trading at a discount to its long-term valuation multiples, and the upside from here will be a function of stability in global and local macros and continued earnings delivery, as per Motilal Oswal.

In a report, the domestic brokerage firm noted that Nifty is trading at a 12-month forward P/E (price to earnings) of 18.8x, a 7 percent discount to its own long-period average (LPA).

It also trades at a 12-month forward P/B (price to book value) of 3x, a 6 percent premium to its long-period average.

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“Notably, Nifty EPS grew ~19 percent over FY20-23 to Rs 807 versus market returns of ~15 percent over Jan’20-Sept’23. Thus, valuations are far more reasonable today than they were in Oct’21 highs,” it said.

Although the Nifty-50 is at a new high and is creating a lot of buzz, on a two-year basis, it is up around 7 percent from the October 2021 high (18,000 level).

The Nifty-50’s journey to the new high was led by a favourable blend of healthy macro and micro factors, moderating inflation and cooling commodity prices, global interest rates near its peak, and six consecutive months of FII inflows with strong retail participation, it said.

Some of the key macro drivers include strong GDP growth of 7.2 percent in FY23 and expectations of 6 percent growth in FY24, as well as moderating inflation (headline CPI inflation stood at 6.8 percent in Aug’23).

Moreover, there has been solid growth in corporate earnings, with Nifty earnings up 10 percent in FY23 on a high base of 38 percent in FY22.

Expectations of high-teens earnings CAGR over FY23-25 have kept the sentiment buoyant, Motilal Oswal said.

“Moreover, we note that during the last five General Elections (1999-2019), the Nifty-50 rallied 10 to 32 percent six months prior to the announcement of election results,” it added.

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Midcap Mania

Though the Nifty-50 is at an all-time high, mid and small-caps have outperformed by a big margin. This year till date, the Nifty-50 is up 11 percent, whereas the Nifty Midcap 100 and the Nifty Smallcap 100 are up 28 percent and 29 percent, respectively.

The large caps remained clear outperformers during Nifty’s journey from 18,000 to 19,000. However, the mid and small caps hit new highs when Nifty moved up from 19,000 to 20,000.

“As the rate-hike cycle seems over and with positive retail sentiment, the mid and small caps remain in favour,” Motilal Oswal added.

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