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    Half of Nifty50 stocks trade at discounts to 10-year averages, but analysts not interested

    Synopsis

    Nomura India said consensus Nifty50 earnings estimates for FY21 are down 27 per cent.

    iStock
    Edelweiss Securities is betting on global-oriented sectors to lead earnings recovery.

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    NEW DELHI: Despite the recent rally, nearly half of Nifty50 constituents are still trading at up to 70 per cent discount to their 10-year price multiples.

    The steepest discounts are being seen in banking, oil & gas, utilities and select pharma names. But not many of these stocks are among analysts’ top picks at present.

    Data showed private lender IndusInd Bank trades at a price-to-book value (P/BV) of 0.8, a 71 per cent discount to its 10-year average of 2.8. SBI trades at a P/BV of 0.6 times, 48 per cent discount to its 10-year average of 1.2. Axis Bank trades at 39 per cent discount to its long-term average P/BV of 2.

    But analysts are showing preference for costlier ICICI Bank and HDFC Bank in the banking space.

    Oil & gas stocks IOC (46 per cent), GAIL (46 per cent) and ONGC (42 per cent) are trading at steep discounts to their 10-year price-to-earnings multiples (PEs). Analysts noted the Covid-induced lockdown globally has led to a sharp drop in refining and petchem margins, but the worst may be behind.

    The three energy stocks are not among analysts' top picks. They are betting on Reliance Industries instead. They also like HPCL.

    Utilities such as NTPC (47 per cent) and Power Grid (29 per cent are trading far away from their long-term averages. A few analysts like NTPC; while many find Power Grid a good defensive play. Both stocks saw earnings upgrades recently.

    Valuations of a few pharma names such as Sun Pharma (25 per cent) and Cipla (10 per cent), FMCG major ITC (37 per cent), engineering giant L&T (30 per cent) and Coal India (49 per cent) are also away from their long-term averages.

    Individual names such as ZEE Entertainment, Bharti Infratel, UPL and M&M are also lagging their historical PE averages. L&T and M&M are among a few stocks that brokerages recently named among their top picks.

    Q4 earnings show stress
    For March quarter, Nifty50 sales fell 5.1 per cent, while Ebitda and PAT for the index constituents declined 4.8 per cent and 20.1 per cent, respectively. The drop in Ebitda was, in fact, the first in 11 quarters.

    During the quarter, India Inc was largely focused on cost-cutting initiatives and cash preservation, wherein companies resorted to salary cuts, layoffs and reduction in contract labour, in addition to postponement of capex.

    JM Financial said most of the companies went in for reduction in advertising and promotion costs, re-negotiated rental costs and froze employee addition.

    Earnings risk remains
    Nomura India said consensus Nifty50 earnings estimates for FY21 are down 27 per cent since the start of FY21 and the extent of earnings cuts has been steeper than seen during GFC and, as expected, much steeper than previous years.

    “To some extent, near-term earnings are going to be supported by pent-up demand, low raw-material costs, lower discretionary expenditure and no material increase in credit costs. With a reversal in some of these factors and slower economic growth, there are risks to further cuts in earnings estimates. At present the market is factoring in 21 per cent earnings growth CAGR over FY20-22, compared with 6 per cent expansion CAGR over FY15-20,” Nomura said.

    Stocks to consider
    Among the stocks with huge valuation discounts, HDFC Institutional Equities prefers ITC, Axis Bank and L&T. It also likes RIL, Bharti Airtel and Infosys, which have performed relatively well of late.

    ICICI Securities likes NTPC, but has HDFC Bank and Kotak Mahindra Bank from the banking space and HPCL from the oil & gas space among its top picks.

    Other than M&M, Nomura’s top picks include RIL, HCL Tech and ICICI Bank, among others.

    Motilal Oswal Securities also likes M&M. Other stocks it likes included ICICI Bank, Bharti Airtel, Infosys, HUL and RIL. The brokerage has upgraded FY21 earnings estimates for GAIL and SBI, but the two stocks are not among its top picks.

    Motilal aAgencies

    Motilal bAgencies

    Edelweiss Securities is betting on global-oriented sectors to lead earnings recovery.

    “Given the much stronger stimulus, a better economic shape pre-Covid19 and less stringent lockdowns, we expect global-oriented sectors such as auto, metals, chemicals and IT to lead earnings recovery. Household incomes are likely to get slashed aggressively and banks are tightening lending standards, which could hurt demand for discretionary consumption,” it said.

    The brokerage said domestic-oriented themes such as consumption, investment and financials are more susceptible to earnings risk than export-oriented businesses.

    10 stocks that analysts say can offer solid returns over the next 2-3 weeks

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    ​Money Making Ideas

    The domestic markets extended their stellar rally to the fourth straight session on Monday, with NSE barometer Nifty reclaiming the 10,800 mark. However, analysts are advising to adopt a cautious approach in the market. "In the current technical setup, we strongly recommend avoiding any major exposure and adopting a highly selective and stock-specific approach," said Milan Vaishnav, CMT, MSTA is a Consultant Technical Analyst and founder of Gemstone Equity Research & Advisory Services.



    Here are 10 stocks that can offer solid returns over the next 2-3 weeks:


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

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    4 Comments on this Story

    sanujit roy22 days ago
    what to do
    Zen Oils26 days ago
    The Indian stock market does not work on metrics and fundamentals , it works on perceptions of FUTURE OUTLOOK even though most of the firms have no major proprietary breakthroughs.
    Leon Fernandes26 days ago
    Contra bets.
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