Rich Val­u­a­tions may Cap Nifty Up­side in Near Term

TIME TO CATCH YOUR BREATH Most favoured stocks are trad­ing above their fair value

The Economic Times - - Markets: Beating Volatility - @times group.com

Ashutosh .Shyam ET In­tel­li­gence Group: The val­u­a­tion com­fort of an­a­lysts to­wards large prom­i­nent com­pa­nies in the bench­mark Nifty 50 is wan­ing. The re­cent sharp rally in the most favoured com­pa­nies in the Nifty such as Eicher Mo­tors, Ul­trat­ech, Hin­dalco, Aurobindo Pharma, Tata Steel, Bhel, Bank of Bar­oda, and Am­buja Ce­ment seems to fac­tor in the pro­jected es­ti­mated earn­ings for the next fis­cal. It is es­ti­mated that th­ese ‘most’ favoured stocks are trad­ing 40-120% higher than their long-term av­er­age price-earn­ings mul­ti­ple.

As a re­sult of this, the bench­mark Nifty in­dex trades at 17.4 times FY17 earn­ings per share (EPS) and 14.5 times FY18 EPS sug­gest­ing that the val­u­a­tion is rich. Sev­eral bro­ker­ages be­lieve that mar­ket up­side will be capped in the near term in the ab­sence of sig­nif­i­cant pos­i­tive trig­gers.

Among the Nifty con­stituents, nine stocks are trad­ing 10-42% higher than their tar­get price is­sued by do­mes­tic bro­ker­age Ko- tak In­sti­tu­tional Eq­ui­ties. Some of th­ese 20 stocks which are trad­ing 0-42% to their fair value are Eicher Mo­tors, Ul­trat­ech Ce­ment, Hin­dalco, and Tata Steel. In ad­di­tion, there are 10 stocks, which are trad­ing 0-10% be­low their re­spec­tive tar­get prices. Th­ese in­clude Lupin, Maruti, Bharti Air­tel, and Re­liance In­dus­tries. From the re­cent low of 6970 on Fe­bru­ary 25, the Nifty has gained 15%, and stocks such as Hin­dalco, Tata Steel, Bhel, Bank of Bar­oda, ACC, Am­buja Ce­ment have gained 20-52% in the

same pe­riod. Among th­ese, the val­u­a­tion of Eicher Mo­tors, Ul­trat­ech, Hin­dalco, Bhel, Am­buja Ce­ment is more than 25 times their FY17 pro­jected earn­ings.

The big­gest con­cern is lack of pos­i­tive trig­gers till the Septem­ber quar­ter when some ben­e­fit of low base ef­fect for earn­ings growth may be vis­i­ble. An­a­lysts fore­see a po­ten­tial earn­ings down­grade due to slow in­vest­ment cy­cle. The con­sen­sus earn­ings growth for the cur­rent fis­cal stands at 23% and runs the risk of a down­ward re­vi­sion by 5-7%. In each of the past five years, earn­ings growth was down­graded by 5-12%.

Con­sid­er­ing this, bro­ker­ages are tweak­ing their model port­fo­lios to re­duce the amount of ‘risk’ from their port­fo­lio and fo­cus­ing on stocks with pre­dictable growth and rea­son­able val­u­a­tion. For in­stance, CLSA re­moved Cairn In­dia and Coal In­dia. In ad­di­tion, it re­placed Marico by Dabur. Sim­i­larly, Ko­tak re­moved Hero Mo­toCorp from the large-cap model port­fo­lio and re­duced the weight of M&M by 100 ba­sis points.

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