25 June 2019
BSE Sensex: 39,435
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S&P CNX: 11,796
Performance and valuation divergence entrenches further
Weak earnings recovery leading to market polarization
Market nerves tested by elevated volatility, domestic slowdown
The Nifty had put up an impressive show in March and the early part of Apr’19, led
by strong FII flows amidst the general elections. Shortly afterward, the election
verdict too turned out to be better than market expectations and a BJP majority
government took office with the Nifty crossing the 12,000 mark in June’19.
However, the euphoria was short lived with the Nifty consolidating in the 11,500-
12,000 range thereafter. Volatility levels have picked up, especially in mid and small-
cap indices, as market sentiment remains exposed to slowdown in the economy,
concerns around liquidity woes for NBFCs and a moderation in consumption on the
domestic front. Meanwhile, the RBI has changed its stance from neutral to
accommodative with another 25bp rate cut. Interest rates have softened globally as
well, with almost USD12t of debt trading at negative yields and the global central
banks sending out further dovish signals.
Polarized markets; valuation divergence continues
As the markets consolidate, the picture has turned more polarized with a few stocks
accounting for the gains in the Nifty. We had highlighted in our
the prevalent divergence in both the large- and mid-cap indices. In that note, we
had illustrated how the top 15 stocks of Nifty were showcasing the benchmark at all-
time highs and how the other 35 were showcasing it at sub-9k levels. That
divergence between these two segments of the market has become quite stark in
terms of both performance and valuations – one trading at a substantial premium
and the other at a huge discount to their long-period average valuations. At this
juncture, we thus believe that it will be useful to sift through the Nifty constituents
and highlight a few names where valuations have turned attractive.
A segment of Nifty trading at 30-50% discount to long-period valuation
We have looked at the Nifty constituents and valuations on different metrics (P/E,
P/B) and also the current valuations versus respective averages (3/5/10 year
averages). For example, some of the stocks where valuations are at a substantial
discount to LPA are –
Eicher Motors, L&T, ITC, M&M, Coal India and ONGC.
Predicting the timing of fortune reversal for these names is always fraught with
risks, more so in the current underlying economic scenario.
…while another at new high
On the contrary, stocks like
Bajaj Finance, Reliance, Titan, Asian Paints, Kotak Bank,
TCS, HUL and Ultratech
are trading at a substantial premium to their respective
5/10-year average P/E or P/B multiples. This polarisation on performance and
valuations clearly underscores two things:  investors taking continued refuge in
the quality/earnings predictability theme in an environment of economic slowdown
and  there is a lack of pick-up in broader market’s earnings growth. Even the
expected FY20 earnings revival (with 26% growth) for the Nifty is predicated on the
Gautam Duggad – Research analyst
Research analyst: Bharat Arora
(Bharat.Arora@MotilalOswal.com); +912261291566 |
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.