Nifty's overvaluation signals imminent market correction; HDFC Bank, LTTS stocks among 'key avoids': Emkay

Stock Market Today

The frontline indices are at risk of imminent 5-10 percent correction, while small- and mid-cap counters are likely to see bigger drawdowns. Domestic brokerage Emkay Global initiated a "key avoids" list as it takes a cautious stance towards the stretched valuations.

As Nifty valuations are stretched and a positive budget is priced in, the lack of favourable triggers will lead to a sell-off, said Emkay. Additionally, a tepid Q1FY25 earnings season combined with rate cuts coming only at end-CY24 will further add to the bearish sentiment, said the brokerage.

The valuations of the frontline stocks have become frothy, with Nifty around 10 percent over the five-year historic mean at 21.4x 1YF PER. Valuations for the NSE Midcap 150 (42x trailing) and NSE Smallcap 250 (31x trailing) are also 52.5 percent and 35.5 percent above their respective 5Y averages.

"Even accounting for the strong growth outlook, we see these valuations having some front-ended future returns and setting up the market for a one-time correction. Only meaningful upgrades in forward estimates could support such elevated multiples, and we do not see that in the next 1-2 quarters," said Emkay.

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The likely correction will be led by Industrials, as a result of their high valuations and Financials, which are the most liquid. Durables, especially Autos, are also vulnerable, said the brokerage. According to Emkay, the best sectors to "hide" in are Staples, Energy, and Technology, in that order.

Emkay initiated a "key avoids" list. The brokerage's underweight stance on financials is reflected through HDFC Bank and SBI Cards, as it sees a derating in both stocks even as the market adjusts to a new growth/ROE reality.

It added Eicher to the "key avoids" list, given its product positioning and valuations. The technology major, L&T Technology Services, is at an unwarranted premium to large-cap IT services names, especially with a looming weak FY25.

PI Industries is the fifth stock that Emkay added to the list, believing that its sub-5 percent EPS for FY25/FY26 is not yet reflected in the valuations.

Despite the likelihood of a sell-off, the brokerage remained constructive on India from a longer-term (over a year) and will use a meaningful correction to increase exposure to the market.

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