Nifty50 valuations remain expensive, but experts are divided on India's growth prospects

• Despite global headwinds and challenging macro environments, Indian markets have remained resilient compared to their global counterparts.
• The benchmark Nifty50’s 12-month forward PE is at a 2% premium to the long period average.
• Kotak Institutional Equities says higher energy prices could derail India’s macroeconomic situation “meaningfully”.

Indian stock markets have remained resilient even as recessionary concerns gain momentum around the world. The benchmark Nifty50 index is at a 2% premium on forward PE when compared to its long-period average (LPA), according to Motilal Oswal.

The Nifty50 is currently down 2% year-to-date even as its global counterparts witness double digit declines – the S&P 500 is down nearly 22%, while Dow is down 18%.

So does this mean the Nifty50 and Sensex are overvalued or expensive? Experts remain divided.

Dhananjay Sinha, head of strategy research and chief economist, JM Financial, says markets are expensive given that the 12-month trailing PE of Nifty50 is around 22x, suggesting a premium of 18-20% over LPA.

“At trailing 12-month PE of around 22x, Nifty50 remains expensive despite the rise in risk-free rate of return, earnings and GDP growth rate downgrades, and expectations of a decline in exports,” Sinha told Business Insider India.

“Indian growth outlook appears stable and a relative outlier. In the medium term, the outlook for equity markets remains healthy, given the strength of domestic macro growth and corporate earnings trajectory,” said Shibani Sarkar Kurian, senior EVP and head- equity research, Kotak Mahindra AMC.

However, analysts at Kotak Institutional Equities recommend caution, saying higher energy prices could derail India’s macroeconomic situation “meaningfully”.

Going forward, the global environment, macro factors and the earnings of India Inc, will determine if the Nifty50 crosses 18k again. “I remain cautiously optimistic about the earnings prospects over the next two quarters,” Kranthi Bathini, director – equity strategy, Wealthmills Securities told Business Insider India.

“Indian markets are in a fairly-valued zone – they are in a consolidation phase, sustaining 17,000 levels since July. This is despite the foreign investor selloff, which was covered for by domestic investors to a great extent,” Bathini added.

Interest rate hikes add to the volatility

Interest rate hikes by central banks around the world – led by the US Fed – have added to the volatility in markets, increasing the woes of investors. Take for instance the Buffett indicator – which compares the total market capitalization to the GDP – is at 92.58% right now, suggesting that Indian markets are not over-expensive.

“The ratio has been volatile, reaching 56% of FY20 GDP in March 2020 from 80% in FY19 and then sharply bouncing back to 112% in FY22,” said Motilal Oswal in a note.

With more rate hikes in store, markets could continue to see volatility in the near term – the range-bound movement in the Nifty50 since July lends credence to this.

“Going ahead, there are multiple global macro factors at play and higher interest rates and inflation are likely to be sticky in the developed world. Given the outperformance of the Indian markets and with relative valuations appearing stretched, it is possible that markets see some volatility in the near term,” Kurian added.

What should investors look for in India Inc’s earnings?

India Inc is gearing up to announce its Q2 FY23 results, with IT giants beginning next week. While the overall IT sector is expected to report subdued earnings, research firms suggest banking and financial services companies are expected to benefit from the rise in interest rates and strong growth in loans.

“By sector, low base is likely to aid strong growth in autos, industrials and consumer services while financials and chemicals shall sustain their momentum. Meanwhile, earnings moderation is likely in IT, pharma, cement and durables,” said a report by Edelweiss Research.

Kurian adds that the focus will be on corporate commentary on demand and margins as we enter the Q2 FY23 earnings season. High-frequency indicators have shown an improvement in activity and early trends suggest festive demand is strong, which are positive indicators for investors.

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