Stock Valuations No Longer Attractive

Indian stock valuations are no longer attractive and the risk-reward is unfavourable, the latest Bulls & Bears: India Valuations Handbook by Motilal Oswal Institutional Equities says.

"Mid-cap/Small-cap companies have been relative outperformers in CY20 and the momentum has continued in Aug'20 with the broad-based performance (discussed in our latest version of Eagle Eye - Chartbook). Relative outperformance of discretionary companies, especially COVID impacted sectors was the highlight of Aug'20. However, at 21x 1-year forward earnings, Nifty valuations do not look as lucrative as they were a few months back. While demand recovery dominates the news-flow (key highlights from our recently concluded 16th MOSL AGIC) and high frequency indicators, we expect incremental upside now to be a function of earnings delivery).

Benign global liquidity and lower interest rates can of-course over-rule other fundamental factors in the interim," the report states.

According to the Bulls & Bears: India Valuations Handbook the Nifty ended 2.8% higher MoM at 11,388 in Aug'20 with the index closing higher for the third straight month now.

Mid-caps and small-caps led the market, making the rally more broad-based. This was aided by huge FII inflows in Aug'20 of USD6.1b - the highest monthly inflows in 10 years.

1QFY21 Corporate earnings highlights

"The 1QFY21 corporate earnings came in above our muted expectations. Nifty sales declined 29% YoY (v/s est. -30%), while EBITDA/PBT/PAT declined 6%/30%/26% YoY (v/s est. decline of 11%/39%/35%). Cost control and cash preservation were effectively deployed as tools to offset the headwinds from the lockdown induced volume declines. Healthcare and IT earnings stood out and we expect these sectors to show continued strength ahead. Our FY21/FY22E Nifty EPS estimates have been marginally revised upwards by 2.1%/2.7% to INR477/INR664 (prior: INR467/INR647)," the latest Bulls & Bears: India Valuations Handbook by Motilal Oswal Institutional Equities.

The top large cap ideas according to the report include Large-caps like ICICI Bank, SBI Life, Divis Labs, Titan, M&M, HUL, Infosys, Bharti Airtel, HCL Tech, Dabur.