Among its global peers, NSE Nifty 50 emerged as the fourth best performing market during the April-June quarter, rallying 10.5%. As a result of its outperformance, Nifty’s 12-month forward PE is one standard deviation above its long-term average. In its report, CLSA noted that Nifty’s valuations are close to being stretched as the premium of the Nifty 12-month forward PE has been more expensive than its current level only 14% of the time.
Nifty 50 valuation concerns
Among the top 19 equity markets in the world, India is expected to deliver the highest two-year EPS growth despite the consensus FY24/FY25 EPS seeing a downgrade of downgrade of 1.0%/1.4%. Nifty’s ongoing rally took the index’s 12-month forward PE from 17.4x at the start of the quarter to 18.6x, which implies a 17.7% premium to its average, said CLSA. India’s valuation premium is well above China’s but Taiwan, USA, and Korea have more extended valuations currently. “This outperformance has taken India’s valuation premium to the EM as well as Asia ex-Japan benchmarks to +1 std,” added the report. Nearly two thirds of Nifty stocks are trading at a premium to their average valuations.
Midcaps and smallcaps outperform
Small and midcap indices outperformed the benchmark, indicating a broad-based rally in the first quarter. Tata Motors, Adani Enterprise and HDFC Life were the best performers
during the quarter, while Infosys and UPL were the only stocks to deliver a negative return in the index. The best performing sectors were realty, auto and telecom. CLSA’s India focus portfolio is overweight in banks, insurance, energy and real estate while IT, staples and discretionary ex-autos are our top underweights, favouring value companies given the ongoing tactical rally.