INSUBCONTINENT EXCLUSIVE:
faces on Dalal Street wear more worry lines than euphoria.
You do not see the Nifty50 rule at a price-to-earnings multiple of 28 too often!
In last 18 years, this has happened only twice before; on both occasions it ended up in quite a bit of bloodletting.
And then, there are
some so-called growth stocks whose PE multiples have soared to anywhere between 80 and 100; expensive by any measure
Does it mean the ongoing rally in stocks is nearing a climax
Dalal Street is divided
beyond frontline companies to explore value in mid-quality stocks.
Prevailing market conditions are constantly reminding investors of the
lifted Nifty50 to a P/E level of 28 on a trailing basis.
This year too, only a handful of Nifty50 stocks have been pushing the index to new
reflecting lack of depth of the current rally
This has been unlike the 2007 rally, when the bull run was broad-based,
Some analysts say though Nifty P/E valuation looks expensive on a
looks manageable at 3.7.
The Indian market, they say, is in a structural bull run, where earnings are showing signs of revival
Investors should remain mindful of growth prospects, they say.
High P/Es for how longBut the average investor still has a dilemma: Will
earnings keep justifying high PEs
Among BSE500 stocks, there are many NBFCs such as Equitas Holdings, Indiabulls Venture and Bajaj Finance,
which are trading at price multiples of 60-160, data available with corporate database Ace Equity shows.
Shares of consumption-oriented
companies such as Page Industries, Gillette, PG, Britannia Industries, Jubilant FoodWorks, Hindustan Unilever, Dabur India, Nestle India,
Marico and Emami are ruling at PEs ranging from 60 to 100
Select paints and discretionary stocks are hovering at even higher valuations.
Smallcap investor Porinju Veliyath, Founder CEO at Equity
Intelligence India, says one needs to find a balance between quality and value.
Look out for medium quality companies in the midcap and
smallcap segment, he says.
The top 10-15 high quality largecaps, whose profit margins are at peak levels, and other operational parameters
are at their best, may end up reporting compounded annual growth rates of around 5-10 per cent over next five years, while medium-quality
midcaps and smallcaps may see 30-35 per cent earnings growth.
Price of a Mercedes for a MarutiThere are over 5,000 listed companies in
Mercedes Benz for a Maruti
There are reasons to buy these stocks
But stocks like the FMCG biggies Britannia or Nestle are at 70-80 times
While you know, these are good quality companies, if you pay a high P/E, you also expect high growth in earnings
He says he continues to retain a reasonable cash position.
On Thursday, Veliyath in a tweet questioned the logic of investing in businesses
which are at their peak operational efficiencies and environment, quoting P/E ratios near the 100 mark and have been giving guidance for 20
per cent CAGR growth for next 20 years
Lupin 52 per cent.
Consumption story unfoldingNot all analysts are this cautious on consumer stocks
Some believe the outlook is improving for the consumer-focused franchises
At the most, there could be a time correction, they say.
Some consumption-focused franchises are indeed trading at forbidding valuations
Some of these stocks will possibly see some time correction, says Ajay Bodke of Prabhudas Lilladher.
June quarter numbers of
consumer-focussed franchises suggest strong growth dynamics
This is true not only for FMCG companies, but also some others
Quick service restaurants are seeing very strong same-store sales growth; auto and auto ancillary franchises are seeing solid sales volumes
and even retail-focused private banks and NBFCs showing great traction, Bodke pointed out during an interview with ETNow
FMCG companies are
posting very strong double-digit volume growth, where rural growth has been a few percentage points higher than urban growth
This is the second quarter on a trot when they have managed to sustain these double-digit volume growth numbers.
What is heartening is that
the pricing power has come back to accompany this double-digit volume growth, leading to strong sustained growth in Ebitda levels, says
Growth hold keyBodke says as long as the underlying earnings growth remains between, say, 25 per cent and 35 per cent, with strong working
capital.
If monsoon outcome is near normal, the growth impulses on the consumption side will strengthen post harvest around Dussehra and
Diwali in the second half of the year
