Nifty trades at 12-month forward P/E of 20x, below long-period average: Motilal Oswal
Motilal Oswal said that market is ruling slightly below its long-term average in terms of valuations. The brokerage said it is biased towards largecaps, with a 76% allocation in its model portfolio. “We are OW on Consumption, BFSI, IT, Industrials, Healthcare, and Real Estate, while we are UW on Oil & Gas, Cement, Automobiles, and Metals,” it further added.
Market closes in red for the fourth consecutive month: The Nifty-50 further corrects 0.6% MoM in Jan’25 after a 2% fall in Dec’24. The market closed in red for the fourth consecutive month. Notably, the index was extremely volatile and hovered around 1,440 points before closing 136 points lower. During the last 12 months, largecaps and smallcaps have gained 8% and 6%, respectively, underperforming midcaps, which have risen 11%. During the last five years, midcaps have significantly outperformed largecaps by 101%, while smallcaps have outperformed largecaps by 75%.
DII inflows vs. FII outflows – the second-highest ever high in Jan’25: Notably, DII inflows (at USD10b) and FII outflows (at USD8.4b) were at second record highs in Jan’25 (DIIs inflows at USD12.8b and FIIs outflows at USD10.9b in Oct’24). DII flows into equities were the highest ever at USD62.9b in CY24 vs. inflows of USD22.3b in CY23. Conversely, FIIs witnessed equity outflows of USD0.8b in CY24 vs. inflows of USD21.4b in CY23.
All major sectors end lower in Jan’25: Among the sectors, Media (-13%), Real Estate (-12%), Healthcare (-8%), Utilities (-6%), and Capital Goods (-5%) were the top laggards MoM. The breadth was balanced in Jan’25, with 25 Nifty stocks closing higher. Bajaj Finance (+16%), Maruti Suzuki (+13%), Tata Consumer (+12%), Bajaj Finserv (+11%), and ONGC (+10%) were the top performers, while Trent (-19%), Dr Reddy’s Labs (-12%), BPCL (-11%), Adani Ports (-11%), and HCL Technologies (-10%) were the key laggards.
India among the laggards in Jan’25: Among the key global markets, the UK (+6%), Korea (+5%), Brazil (+5%), Russia MICEX (+4%), the US (+3%), Taiwan (+2%), and MSCI EM (+2%) ended higher in local currency terms. Conversely, China (-3%), Japan (-1%), and India (-1%) ended lower MoM in Jan’25. Over the last 12 months, the MSCI India Index (+9%) has underperformed the MSCI EM Index (+12%). Over the last 10 years, the MSCI India Index has notably outperformed the MSCI EM index by a robust 144%. While India’s share of the global market cap stood at 3.9%, a 10-month low, it remains above its historical average of 2.7%.
Corporate earnings in line so far in 3QFY25: The 3QFY25 earnings are in line with modest expectations, but forward earnings revisions are the weakest in recent times, with downgrades far outpacing upgrades, especially in our non-Nifty-50 universe. The Nifty-50 is likely to clock a modest ~5% EPS growth in FY25E (following a 20%+ CAGR during FY20-24). For the 183 companies within our MOFSL Universe, sales/EBITDA/PBT/PAT were +5%/8%/7%/3% YoY (vs. est. of +6%/6%/5%/4%). Excluding Metals and O&G, the MOFSL Universe companies recorded a sales/EBITDA/PBT/PAT growth of 10%/10%/11%/8% YoY (vs. est. of +10%/10%/10%/8%) in 3QFY25 so far.
Our view: Weakness in consumption, coupled with a drag from commodities, has put pressure on earnings, even as BFSI, Healthcare, Capital Goods, and Tech have posted a healthy print. With the government shifting its focus from capex to consumption in its budget, we expect a realignment in portfolios and further moderation in the multiples of Industrials/Capital Goods/Manufacturing sectors. The underperformance of Consumer Staples may also be behind, in our view, as the INR1t tax relief for middle-class taxpayers works its way through the wallets and reflects in consumer spending in the quarters to come. We expect multiples of Consumption companies, especially Staples, to rebound after a steady de-rating since FY20. The Nifty is trading at a 12-month forward P/E of ~20x, below its long-period average (LPA) of 20.6x. Overall, with broader markets trading at significant premiums vs. their own LPA and Nifty, we remain biased toward largecaps, with a 76% allocation in our model portfolio. We are OW on Consumption, BFSI, IT, Industrials, Healthcare, and Real Estate, while we are UW on Oil & Gas, Cement, Automobiles, and Metals.
Top ideas: Largecaps – ICICI Bank, SBI, Bharti Airtel, HUL, L&T, LTIMindtree, Sun Pharma, Maruti Suzuki, M&M, Titan Company, Trent, and Cummins India; Midcaps and Smallcaps – Indian Hotels, Dixon Tech, BSE, Godrej Properties, JSW Infra, Coforge, Page Industries, IPCA Labs, Metro Brands, Angel One, and Vinati Organics.
