Nifty valuation rises, but not everyone is worried

On Monday, bulls kept up the momentum amid thin volumes to drive the Nifty to a new high, led by ICICI Bank, Reliance Industries, Bharti Airtel, ITC, and Bajaj Finance.

The index touched a record 22,186.65 points during the day, before closing 0.37% up at 22,122.25. Despite the benchmark making new life highs in a matter of weeks, analysts believe that valuations aren’t stretched and markets could continue to move up at a gradual pace from current levels.

The index’s previous life-high was 22,126.8 on 2 February, slightly above the previous high of 22,124.15 on 16 January. On a one-year forward basis, the Nifty trades at a price to earnings multiple of 18.1 times against the historic average of 16.96, shows Bloomberg data.

While prices have risen, earnings have grown, too, which has prevented the formation of a bubble. While revenue of 1,779 listed companies grew by 10.95% year-on-year in the December quarter, net profit surged 25.08% during the period, Mint data showed.

Excluding companies in banking, financial services and insurance space, revenue was up a tepid 5.29%, but profits soared 38.59%.

“Despite the market hitting new life highs at regular intervals, valuations look ok because of robust earnings growth,” said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies. “We are factoring 15% earnings growth for FY25, which could be raised in H2 (second half), because of the multiplier effects of government spending ( ₹11.11 trillion).”

Nityanand Prabhu, ED and business head, LIC Mutual Fund agreed. “Earnings have been robust; even as Nifty has risen so have earnings, which have not stretched valuations to bubble territory.”

Though Prabhu has a “bullish” outlook for the long term, a pullback or correction of 5–10%, he said, would be “normal” and “healthy” and could be an “attractive entry point”.

The 31% rise in the Nifty from its low of 16,828.35 on 20 March 2023 through Monday’s closing of 22,122.25 was led by cumulative foreign and domestic institutional buying. While domestic institutional investors have pumped in a net ₹1.45 trillion so far this fiscal, FPIs have net-invested ₹1.67 trillion. Monday’s rally lifted India’s market capitalization to $4.78 trillion.

Retail investors on BSE who directly buy and sell on the exchanges have booked profit during the fiscal by net selling ₹773.77 billion.

The figure on NSE stands at a negative ₹53.88 billion in the fiscal through December. While provisional cash figures for FPIs and DIIs were unavailable until press time, FPIs covered part of their bearish cumulative index futures outstanding positions on Nifty. Their cumulative net short positions stood at 63,809 contracts on Monday, down from 68,790 contracts on Friday. NSE’s turnover stood at ₹950.51 billion on Monday against the monthly average so far of ₹1.24 trillion.

Nirav Karkera, research head of online investment company Fisdom, cautioned that the relatively tepid top line growth in Q3 showed that there was stress in demand and that if raw material prices or wages increased, going forward, that could pressure the bottom line, which has so far been robust.