Half of Nifty 50 shares at discount to historical average, even as Nifty trades at premium valuation

Half of the 50 stocks in the NSE Nifty 50 index are trading at a discount to their respective historical averages, even as the benchmark index itself is at a premium valuation at present, brokerage and research firm Motilal Oswal said in a report. When compared to their 10 year average PE, Axis Bank and IndusInd Bank are down 63%, while Coal India is at a discount of 62%, and ONGC is down 61%, among some of the notable names. While 50% of the Nifty companies are at a discount, the index itself is above its long-term historic average. “The Nifty trades at 12-month forward P/E of 19.8x, 5% premium to its long-period average. The Nifty’s P/B of 2.5x is near its historical average,” the report said.

Other companies that are currently at a discount to their historical average include ICICI Bank, State Bank of India, ITC, Larsen & Toubro, Indian Oil, ONGC, and NTPC, among others. Interestingly, most of the banking and financial services sector players are trading at discounted valuations. On the other hand among the consumer sector players only ITC was below its historical averages. Meanwhile in the oil and gas industry, only Mukesh Ambani’s Reliance Industries Limited (RIL) was at a premium to its 10 year average PE. Among the firms that are way above their historical averages are HCL Technologies, up 100%, RIL which is at a 82% premium, followed by Divis Labs, Infosys, and Titan among others. Most IT companies are trading at a premium.

The Nifty 50 index is, however, above the 10-year average. “The Nifty’s 12-month trailing P/E of 24x is trading at 21% premium to its long-period average of 19.8x. At 2.7x, the Nifty’s 12-month trailing P/B is at near its historical average of 2.8x,” the reported added. However, Nifty’s 12-month forward RoE of 12.8%, below its long-term average of 13.9%. According to the report, Nifty’s RoE is likely to remain below the average of 14.4% till the next fiscal year.

In the month of September, the brokerage firm said, midcaps have outperformed large caps in September. The Nifty midcap 100 was up 1.8% while Nifty 50 was down 1.2%. “Best mid-cap performers in September were Persistent Systems (+39%), Laurus Labs (+27%), Strides Pharma (+19%), Ajanta Pharma (+9%) and Aegis (+8%),” the report said. Even when compared over the last 12 months, mid-caps are up 6% against the 2% fall in Nifty. Over the last 5 years, mid-caps have underperformed by 10%.

Among sectors, the report noted that the Information Technology space, along with the healthcare sector are trading at premium valuations. “Technology sector is trading at a P/E of 22.6x, at a 32% premium to its historical average of 17.1x. Despite the COVID-19 disruption, Indian IT has seen limited impact on its revenue, strong deal signings, and closure of certain marquee deals,” the report said. IT players are set to benefit as more of the physical economy migrates to the Digital space and cloud adoption is accelerated, the brokerage firm said.