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ETMarkets Midyear Survey: Valuations not screaming buy; one can’t rule out earnings downgrades

Most brokerages ETMarkets talked to in its MidYear Survey felt the recent correction in the market was healthy, but there have not been any material downgrades in earnings estimates, suggesting the market remains upbeat on India’s earnings so far, despite a risk-off sentiment globally.

Analysts said there are select pockets where valuations have turned attractive, but the market as a whole is not a ‘screaming buy’ for now. The market would need another 5-10 per cent correction to make valuations look attractive, a few analysts felt.

Vinit Bolinjkar, Head of Research, Securities, said valuations are not giving a screaming buy. Bond yields have just started the upcycle and are not expected to reach the peak at least in the near term, he said. “Hence, one can accumulate stocks but need not jump the gun,” Bolinjkar said.

Deepak Jasani of

Securities said select stocks have become attractive. “However, we do not know whether there could be an earnings downgrade going forward. The technical reason of supply from FPIs could act as a deterrent to aggressive bottom fishing,” he said.

In terms of the BEER ratio,

Securities said the average BEER ratio historically for the Indian market has been around 1.50, and the current level is around 1.25.
Theoretically, it seems markets are overvalued, as equities are deemed expensive at a value above 1. But looking at historical data, India has not gone below the BEER ratio of 1 since 2008, Religare noted.

On the other hand, India’s market cap-to-GDP ratio is around 100 per cent against the 80 per cent level, where it was stable in the pre-pandemic period.

“But post-pandemic, there has been the formalisation of the economy which should bring the base of this ratio higher for any assessment. Hence on this ground too, we don’t see that the market is too expensive at this stage, Religare said.

Religare suggests a 5-10 per cent correction in the market from the current level that could make valuations attractive.

Yesha Shah, Head of Equity Research, Samco Securities, said the potential

impact on corporate earnings due to cumulative rate hikes and inflation makes her believe that even though valuations of key indices have cooled off, they certainly are not in the reasonable range yet.

“Having said that, value has started to emerge in some pockets of the market such as in selected IT names, banks,” she said.

Any de-rating of Nifty EPS due to high inflation or growth slowdown could lead to further correction in the near term, said Punit Patni, Equity Research Analyst,

.

“Nonetheless, India’s medium to long-term growth outlook remains positive and the current levels look good to start deploying funds gradually. We can conclude that Indian markets post the recent correction have turned favourable from a long-term perspective, but further 5-10 per cent correction can’t be ruled out,” Patni said.

For Yash Gupta of Angel One, the market has entered neutral from an overvalued zone. At the start of the year, the mcap-to GDP was at 115 level, which is down to 100 now.

Though the one-year Forward PE multiple has retraced, there is no meaningful downgrade in earnings, said YES Securities, adding that the markets remain

on the earnings prospects.

YES Securities said the earnings momentum remains very much intact and it does not see valuations falling much beyond the historic mean levels. “The recent fall in m-cap to GDP ratio is simply a transient phenomenon. If we look at things from a broader perspective, the ratio will continue to see a steady rise given the wider formalisation of the economy and more enterprises raising capital from the bourses,” it said.

Shiv Chanani, Head of Research, Elara Securities, said the recent market correction is largely accounted for by correction in valuation multiples as consensus earnings estimates have not seen any meaningful downgrades. It would not be wrong, he said, to say that aggregate valuations have seen correction in line with the market.

“With this correction, valuations are now largely in the long-term trading range of 15-18 times PE one year forward. However, specifically, there are certain pockets like BFSI space which have seen steeper corrections in valuations are now at the lower end of the 10-year trading range,” he said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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