Nifty’s premium valuations take hit, slip below 5-yr average

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March 6, 2020 3:00 AM

At the present levels of 11,269, the Nifty trades at a price/earnings multiple of 16.6 times one-year estimated forward earnings against the five year average PE of 16.9 times, Bloomberg data showed.

Overseas investors have sold Indian shares worth $2.6 billion in the last nine sessions bringing the Nifty down by 7.4% so far in 2020, against a gain of 12.02% in 2019.Overseas investors have sold Indian shares worth $2.6 billion in the last nine sessions bringing the Nifty down by 7.4% so far in 2020, against a gain of 12.02% in 2019.

The valuation of the benchmark Nifty50 Index has slipped below its five-year average, as coronavirus-led sell-off saw the index plunging nearly 9% from its January highs. Even as the spread of Covid-19 has sent shivers across the global markets, a sharp sell-off was particularly seen in countries where a lesser impact was seen. Market participants say though the virus is being held responsible for the correction, the underlying trigger could also be premium valuations that these markets have been enjoying over the years.

At the present levels of 11,269, the Nifty trades at a price/earnings multiple of 16.6 times one-year estimated forward earnings against the five year average PE of 16.9 times, Bloomberg data showed. Despite a string of downgrades post the disappointing Q3FY20 results and chances of earnings growth not living up to estimates, the Nifty continued to trade at exalted valuations as investors favoured safer stocks amid a slowing economy.

The valuation of Nifty50 has come off 13.3% from the peak of 19.16 times that it had seen in August 2018 as foreign portfolio investors have been taking risk off the table. Overseas investors have sold Indian shares worth $2.6 billion in the last nine sessions bringing the Nifty down by 7.4% so far in 2020, against a gain of 12.02% in 2019.

The net profit for a sample of 2,592 companies (excluding banks & financials) declined 11.3% Y-o-Y in the three months ended December 2019, as companies were unable to grow sales due to poor demand. The revenue for the sample fell by 3% during the quarter.

Nomura is of the view that India is relatively less exposed to disruptions emerging from the Covid-19 outbreak, compared to peers in Asia. “In our assessment, the impact on Nifty earnings on account of Covid-19 disruption is likely to be less than 5% for FY21, over and above our expectation of a 5% cut in consensus earnings due to slower economic recovery,” the brokerage said in a note.

Pramod Gubbi, founder at Marcellus Investment Managers, said: “What we are seeing in the markets is a knee-jerk reaction and the volatility may continue for some more time. However, I don’t think there would be any long-term fundamental impact on the market even as some companies may see earnings cut due to stringent supply chain disruption in the next two quarters. Currently, it is very difficult to predict the market for short term, as most transactions are being executed through algorithm trades.”

According to analysts, India continues to command a higher valuation vis-à-vis other emerging markets as passive funds have been deploying money in select stocks. According to an IIFL Securities report dated January 8, ETFs now own 8.5% of total Nifty free float and almost one-sixth of the overall institutional ownership. “In the last five years, money indexed to either Nifty/Sensex /Bankex /CPSE has risen by 24x to $23 billion, 14% of total domestic mutual fund equity AUM,” said the IIFL Securities note.

It is noteworthy that South Korea, where the largest number of cases has been reported outside China, is still trading well above its five-year average earnings multiples. At Thursday’s close, Kospi commands a PE multiple of 11.17x, which is 9% premium to its five-year average of 10.24x, showed Bloomberg data.

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