Nifty 50, midcap, smallcap indices, most sectors overvalued, says HDFC Sec (2024)

The key benchmark indices Nifty 50, Nifty Midcap 100 and Nifty Small-Cap 100 have delivered 22%, 56% and 66% returns, respectively, over the last year.

According to analysts at HDFC Securities, all these three indices seem to be overvalued at the aggregate level advocating bottom-up stock picking for future returns from here as further expansion of multiples is unlikely.

The extent of overvaluation relative to history is the highest in small caps while on an absolute basis, the mid-cap index is the most overvalued, as per the analysis.

Another aspect of this rally is that it’s been very broad-based as around 70% of stocks in each of the indices are trading above their long-term (12 years) average valuations.

Also Read: Indian stock market: Why Nifty 50 index may touch record high this week — explained with 5 reasons

This level of overvaluation and breadth has been seen only a few times in the past 20 years (2007 when ~75% of Nifty constituents were overvalued relative to history) and to a lesser extent in FY15-17 (~44% of mid-cap constituents overvalued) and FY21-22 (~46% of mid-cap constituents overvalued), the brokerage noted.

“We believe it’s time for investors to get more selective and bottom-up across all market-cap indices as the phase of easy and broad based returns might not repeat in FY25-26," said Varun Lohchab, Institutional Research Analyst, HDFC Securities.

Based on the valuation analysis, the brokerage finds banks and staples in the Nifty 50 index to be relatively less expensive, while IT and consumer discretionary to be the most expensive.

“In terms of stocks, within our coverage where the analyst rating concurs with the valuation argument, key buy ideas are Kotak Mahindra Bank, Bandhan Bank, Crompton Consumer, Aurobindo Pharma, and City Union Bank.

On the other hand, stocks that are most stretched vs historical valuations and negative views of analysts are Tata Motors, Nestle India, Titan Company, and Britannia Industries," Lohchab said.

Also Read: Week Ahead: Macro data, FII mood, global cues among key market triggers as Nifty 50 eyes 22,150+ this week

Here’s an analysis of all the three indices:

Nifty 50

As of January 2024, the latest price-to-book valuation for the Nifty 50 index was 114% of the average historical valuation, indicating expensiveness. Previously when this ratio crossed 100 and touched 103% in FY22, the index declined by 1.8% in the subsequent financial year FY23.

According to HDFC Securities, 66% of the constituent stocks of the index trade above their historical valuations. This is the highest in the last 13 years.

Moreover, barring chemicals (UPL), all sectors in the Nifty 50 are trading at a premium to their historical valuations. However, on a relative basis, BFSI, cement & building materials and consumer staples are cheaper sectors of the index currently while telecom, IT and consumer discretionary are the most expensive sectors.

Nifty Midcap 100

The index is trading at a P/B of 7.7 which is only ~2% below the peak made in FY22. The index is currently trading at 122% of its historical P/B valuation. 67% of the constituent stocks of the index trade above their historical valuations surpassing the previous peak of 49% made in FY15.

Except for telecom and media, every sector of the index is trading at a premium to its historical valuations. On a relative basis, industrials, power and engineering are the most overheated sectors.

Also Read:

Nifty Smallcap 100

The Nifty Small-Cap 100 index is trading at a P/B of 6.7 which is the highest since FY13. Furthermore, the index is currently trading at 149% of its historical P/B valuation surpassing its previous peak of 125% made in FY21. 70% of the constituents of the index are trading at a premium to their historical valuations indicating the broad-based richness of valuations, the brokerage report said.

Except for the media, every sector of the index is trading at a premium to their historical valuations with chemicals, consumer durables, energy, IT and BFSI being overheated sectors.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 19 Feb 2024, 10:12 AM IST