Domestic equity markets have remained volatile in the past few weeks. The recent correction on Dalal Street has made Nifty50 valuations fall below historical averages, making a host of stocks look attractive on the valuation front. At present, half of the stocks on the Nifty50 index are trading below their long-term valuation multiples. Santosh Meena, head of research, Swastika Investmart Ltd., said that “Nifty50 has corrected 20 per cent from its peak levels and individual stocks have corrected more than that. The rising inflation which has compelled central banks to hike interest rates, the Russia-Ukraine war, overvalued stock indices, and slow down of global economic growth are some of the reasons that have led to this selloff. Nonetheless, the current correction provides a good opportunity to accumulate quality stocks as the valuations have turned reasonable.”
At the end of June, Nifty50 traded at a 12-month forward P/E of 17.6 times, which was at a 9 per cent discount to its long-term average.
Sector-wise, auto sector PE of 23 times is at an 8 per cent discount to its historical average of 25 times. Metals sector trading at an EV/Ebitda ratio of 4.6 times is quite below its 10-year historical average of 6.6 times. Despite the recent correction, the technology sector is trading at a P/E of 22.2 times, at a 19 per cent premium to its historical average of 18.6 times.
The global uncertainty due to war, rising interest rates, sticky inflation, and fears of a recession are key factors which have been responsible for the markets to underperform in last few months.
“The adverse macro backdrop, with heightened worries on rising interest rates, elevated crude oil prices, and liquidity tightening, has kept the market volatile and jittery. After the correction, the Nifty50 trades at 18.4 times FY23E, below its 10-year average P/E of 19.5 times. We find more value in largecaps than midcaps, given the relative valuation equation,” Motilal Oswal said in a note.
What Should Investors Do Now?
Narendra Solanki, head- equity research (fundamental), Anand Rathi Shares & Stock Brokers, said: “For current results season investors should focus on two key things revenue growth and sustainability and margins during current volatile phase. The companies reporting sustained momentum in growth with stable to improving margins are expected to perform well. From strategy perspective, investors should start adding stocks as markets are looking to stabilise with signs of inflation peaking out by second half of current year looks possible.”
“The current arduous times are the biggest tests of the investor’s patience and psychological strength. “Be greedy when others are fearful”, one of the best times to invest is during uncertain and volatile periods thus, we recommend buying the dips strategy. However, investors must lower their expectations and they will never be disappointed,” Meena explained.
Top Stock Picks
Ahead of the June quarter earnings season, strategy notes of a few brokerages have a few common recommendations such as ICICI Bank, Maruti Suzuki, SBI, Bharti Airtel, and others.
For Motilal Oswal Securities, Reliance Industries, Infosys, ICICI Bank, SBI, Bharti Airtel, ITC, Titan Company, UltraTech Cement, Mahindra & Mahindra, Hindalco, and Apollo Hospitals are its top ideas from the large-cap pack.
ICICI Bank, Maruti Suzuki, SBI, and Tata Motors are Emkay Global’s top picks.
Asutosh Mishra, Head Of Research, Institutional Equity, Ashika Group, talking about the banking sector said: “We expect robust earnings growth in banking space and thus see large private and public sector banks to continue to outperform the overall market in the next few months. Within banking space we like ICICI Bank, SBI followed by HDFC Bank and IDFC First Bank.”