Indian benchmark indices are at a 6-month high but are still 5 percent away from pre-COVID levels. The first case for COVID in India was registered on January 30. Sensex closed at 40,913 and Nifty50 ended at 12,035 that day.
Benchmark indices may still be away from their pre-COVID levels, but there are 184 stocks, largely from the small & midcap space, in the S&P BSE500 index that are trading at pre-COVID levels.
Out of 184 stocks, 8 have rallied more than 100% since then. These include Laurus Lab, Alkyl Amines, GMM Pfaudler, Birlasoft, Dishman Carbogen, Adani Green, Granules India and Tata Communications.
As many as 26 stocks out of 184 rallied 50-100%, including IndiaMart Intermesh, Glenmark Pharma, Ipca Laboratories, Tasty Bite, Vaibhav Global, Suzlon Energy, Divis Laboratories and Dixon Technologies.
Small & midcaps have hogged the limelight since March as liquidity started chasing growth and undervalued stocks. Most of the largecaps were trading at high valuations, and after 2 years of underperformance small & midcap stocks were looking attractive.
Benchmark indices have rallied by about 50 percent from the lows, but are still negative on a year-to-date (YTD) basis. Technicals suggest that the bull run is likely to continue for some more time but risk-to-reward is not favourable; hence, it makes sense to remain stock specific.
“The valuations of some small and midcaps had fallen significantly over the last 2-3 years. The market had polarized into a handful of extremely overvalued, mostly, consumption-oriented, popular stocks, and the rest of the market was divided into capital destroyers and eroders which were rightfully cheap,” Dr. Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital told Moneycontrol.
“Many companies with strong balance sheets, persistent advantages but ignored by the market due to less familiarity, inaccurate analysis & misguided perceptions which were at significant discounts to their intrinsic values,” he said.
Gupta further added that the March downturn in the market caused a few sophisticated fund managers or investors to do a fresh search across markets to find new opportunities. “These ended up driving the rebound in the stocks with strong balance sheets and strong growth opportunities but mispriced, which we alluded to above,” he explained.
The road ahead
The road ahead for benchmark indices might not be that exciting but stock-specific action may well continue, say, experts.
Indian market is mimicking what is happening across the globe. US markets has hit a fresh record high and the rub-off effect is seen in emerging markets and India is no exception.
We are not yet out of COVID neither in the US nor in India. Hence, what we are seeing is a hope rally. Yes, certain companies would benefit from the pent-up demand as and when the economy starts to claw back to normalcy but that is still some time away.
The ideal approach right now is to sit tight if you have already invested or wait for a dip to put in fresh cash at current levels.
“Globally most developed markets (i.e. Nasdaq Composite, Dow Jones, S&P 500 and MSCI World Index) are trading at new peak valuations. Even the 2-Year Fw PE of these markets is either at par or above the peak valuations seen in the last 15 years (on Fw PE basis). In India, the Nifty-50 has historically peaked out at ~19x on Forward PE basis,” Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities told Moneycontrol.
“The Index is now trading at 18.5x on Mar’22 EPS estimates, which is very close to its historic peaks. As bond yields globally are at historic low levels the valuations of equities could remain at elevated levels. Today for example the Bond PE in India is close to ~17x, which will allow Equity PE to remain 200-300 bps above that level,” he said.
Oza further added that we are somewhere nearing the peak but the ample liquidity, falling Dollar Index and lower bond yields are working in favour of equities as of now. “Extremely rich valuations has made the risk-reward ratio quite unfavourable. The upside could be in mid-single digit whereas the downside could be in higher double digits,” he explains.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.