Short Call | Decoding Nifty's premium valuations, sugar stocks soar amid market slump; HDFC Bank, AIA Engg in focus

As of FY14, only 14 percent of the Nifty-50 stocks were trading above 30x trailing P/E. That figure has now surged to 50 percent.

For those fretting about India's expensive valuations, broking firm Motilal Oswal's latest strategy report makes some interesting points. Firstly, the Nifty's one-year forward price earnings ratio of 20.3x is at par with its 10-year average. Secondly, India has been enjoying premium valuations in the emerging market space for a while now. Healthy macros, consisting corporate earnings growth, better corporate governance norms are some of the key reasons.

And yet, the headline number can be misleading. As of FY14, only 14 percent of the Nifty-50 stocks were trading above 30x trailing P/E. That figure has now surged to 50 percent. High growth expectations is driving up the earnings multiples, but they also limit the scope for huge gains like those seen over the last couple of years.

And within the Nifty basket, there are divergent trends. Of the 17 Nifty-50 sectors, three are trading at a discount to their historical averages, while the rest 14 trade at a premium. Those looking for bargains may want to look at private banks/PSU banks/NBFCs which are currently trading at 18/13/5 percent discounts to their 10-year avg. forward P/E ratios of ~ 20x/10x/19x. And those upbeat on utilities/ logistics/cement should bear in mind that these sectors are trading at a premium of 74/ 50/46 percent to their 10-year average forward P/E ratios of ~10x/19x/22x.

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Sweet relief
On a day when both the Nifty and Sensex dived, sugar stocks soared on news that the government may hike ethanol prices for the 2024-25 season. The proposal, under review by a petroleum ministry committee, aims to boost ethanol prices and diversify feedstocks to hit a 20 percent blending target by 2025-26. A committee led by a joint secretary from the petroleum ministry has reviewed the proposal, which aims to adjust ethanol prices in line with the fair and remunerative price of sugarcane, according to PTI.

AIA Engineering (Rs 4,549.90, -5.47%)

Stock falls weak Q1 results as volume-hit continues

Bull Case: Company well-positioned to capitalize on the shift to high chrome mill internals in mining and cement sectors, with its expanding capacity and comprehensive solutions boosting EBITDA margins to over 22% and RoE above 17%.

Bear Case: Faces risks from volatile raw material prices and dependency on cement, mining, and power sectors; any downturn or supply issues could compress margins and hinder volume growth despite its expanding capacity and market potential.

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HDFC Bank (Rs 1,603 | -3.46%)

MSCI announces weight increase in 2 tranches

Bull case: Although MSCI made an exception by raising weightage with lower adjustment factor, the remaining float adjustment due in November 2024 rejig may help re-rating of the stock down the road. Higher deposit mobilisation and rising margins can also help bolster HDFC Bank that has remained stagnant this year.

Bear case: Since the LDR ratio of the private lender exceeds over 100 percent, much above the mandated threshold of 80-90 percent, lower deposit mobilisation compared to credit growth can be an overhang for the stock. If it increases deposit costs, it can compromise margins of the lender, negatively impacting the stock.

(With inputs from Harshita and Lovisha)