Big divergence in Nifty valuations: Motilal Oswal


There is a stark divergence between Nifty constituents on both performance and valuations with one segment trading at a substantial premium and the other at a huge discount to the long-term average, said domestic brokerage Motilal Oswal, adding that there is limited headroom for valuation re-rating at index level given the continued downside risks.

Some of the stocks where valuations are at a substantial discount to long period average are Eicher MotorsNSE 1.71 %, Larsen & Toubro, ITC, Mahindra & Mahindra, Coal IndiaNSE -0.35 % and ONGC, said the brokera

Bajaj Finance, Reliance Industries, Titan Company, Asian Paints, Kotak Mahindra Bank, Hindustan Unilever and UltraTech CementNSE 0.04 % are trading at a substantial premium to their respective five or ten-year average price-to-earnings or price-tobook multiples, said Motilal Oswal.

Predicting the timing of fortune reversal for these names is always fraught with risks, more so in the current underlying economic scenario, the brokerage said.

“This polarisation on performance and valuations clearly underscores two things: one, investors taking continued refuge in the quality/earnings predictability theme in an environment of economic slowdown and two, there is a lack of pick-up in broader market’s earnings growth,” said Motilal Oswal.

The brokerage said that the revival in Nifty earnings in FY20 is predicated on normalisation of credit costs in the banking sector. The banking, financial services and insurance space is expected to account for 70% of incremental earnings for the Nifty in FY20, the brokerage said.

At 19.5x FY20E P/E, we do not see material room for further valuation re-rate,” said Motilal Oswal.

ICICI Bank, HDFC, SBI, Titan, L&T, Coal India, Infosys, Bharti Airtel and Maruti Suzuki India are top large-cap ideas of Motilal Oswal.

The brokerage’s mid-cap picks include Federal Bank, DCB Bank, Indian Hotels, Crompton Consumer, KEC InternationalNSE 0.57 %, Ashoka Buildcon, Aditya Birla Fashion and Zensar.