Nifty valuation no more in bubble, but FII selling, inflation, other headwinds keep investors on toes

Indian share markets have scaled-down and have corrected 13-14% from all-time highs, making equities valuations much cheaper but not yet attractive enough.

Nifty valuations
The selling by FIIs continues as inflation has increased sharply to an 8-year high in India and a 40-year high in the United State. (Image: REUTERS)

Indian share markets have scaled-down and have corrected 13-14% from all-time highs, making equities valuations much cheaper but not yet attractive enough. Benchmark valuations have fallen from the ‘bubble territory’ of 1-year forward PE of 25x to now at around 18x 1-year forward PE. However, the unrelenting selling by Foreign Institutional Investors (FII) and multiple headwinds are still keeping analysts on their toes. “Valuations have fallen from highs but the premium to other markets is still high,” Deepak Jasani, Head of Retail Research, HDFC Securities told FinancialExpress.com.

Valuations down but should you buy?

Nifty hit a low of 16,008 on Wednesday, down from the all-time high of 18,604. Independent Market Analyst Ajay Bodke told FinancialExpress.com that valuations have fallen from the bubble territory owing to factors such as deteriorating macros and FII outflows, massive pressure on margins of firms across sectors due to spike in industries and agri commodity prices, and a slowdown in aggregate demand, especially in rural and semi-urban areas.

Bodke believes this will now manifest in sharp erosion in earnings growth this fiscal year as compared to lofty earnings estimates pinned by analysts on the Street. “There is a double whammy of PE derating and a sharp downward revision in EPS numbers, this lethal combo can lead to further downward pressure on equities,” he said.

Meanwhile, Deepak Jasani is keeping an eye on inflation and interest rates before investing. “Till inflation and interest rates situation is out of the way, one can not say Nifty is at an attractive level,” he said.

On the other hand, Vinod Nair, Head of Research, Geojit Financial Services think investors can still accumulate on a near to medium-term basis. “Nifty valuations are not very attractive, but yes they have consolidated well,” Nair said. He added that the 1-year forward PE of Nifty is just marginally above the long term average. However, considering the sharp correction seen on Dalal Street of late, he does think investors can start accumulating stocks.

Analysts are in consensus that earnings outlook is not too bright at this juncture. 

FII selling aggravates downfall

The fall has been led by massive outflows from FIIs in recent months. “The unrelenting FII selling looks like it will continue for some time to come with a sharp deterioration in macros,” Ajay Bodke said. He added that many emerging markets and in particular those that are dependent on commodity imports, such as India, are especially vulnerable to unabated FII outflows. FIIs have pulled out more than Rs 36,000 crore from secondary markets so far this year.

The selling by FIIs continues as inflation has increased sharply to an 8-year high in India and a 40-year high in the United State. GDP projections for India have also come down although it is likely to retain the tag of the fastest-growing economy. 

Vinod Nair highlighted that while FII selling has continued, domestic institutions who have been net buyers, now seem to be reducing their inflows. However, he added that FII selling could lessen in the coming months. “We can expect some support from the RBI on the currency front and the hawkish policy of RBI on interest rates can also provide support to the currency. If that happens and FED policy is mostly in lines, then we can expect FII selling to reduce,” Nair said. If FIIs soften their sell-off, domestic investors could return in his view.

What to buy?

Vinod Nair said that some stocks have corrected heavily, so he suggests considering that and other factors along with short-term attractive valuations. Ajay Bodke believes investor focus has to now move towards protecting the capital values of their investments. “I think sectors that offer relative safety are some large private banks, telecom, large-cap IT where there is some comfort. FMCG, Consumer Staples, and Consumer discretionary including auto, domestic cyclicals, and cap goods can see a downside move.”

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