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Nifty not a teen anymore! 

All-time high, but not on valuations

Easy 1,000-point top-up! 

* The Nifty-50 has touched the milestone of 20,000 in Sep’23. After a volatile and long journey from 18k to 19k, the Nifty-50 added the next 1,000 points (19k to 20k) relatively faster — only 52 trading days (from Jul’23-Sep’23) vs. 425 trading sessions (from Oct’21-Jun’23) during its journey from 18k to 19k.

* Despite the headwinds, the Nifty-50 managed to recover from its Jun’22 and Mar’23 lows to reach 20k, mainly fueled by strong FII/DII inflows of USD20.8b/USD7.8b between Mar’23 and Sept’23. FII and DII flows stood at USD16.5b and USD14.2b, respectively, in CY23YTD.

* The Nifty-50’s journey to the new high was led by a favorable blend of healthy macro and micro, moderating inflation and cooling commodity prices, global interest rates near its peak, and six consecutive months of FII inflows with strong retail participation led by positive sentiment.

* Some of the key macro drivers are 1) strong GDP growth of 7.2% in FY23 and expectations of ~6% growth in FY24, 2) moderating inflation (headline CPI inflation at 6.8% in Aug’23), 3) narrowing CAD (to 0.2% of GDP in 4QFY23), 4) stable exchange rates, and 5) global interest rates nearing its peak. Moreover, solid growth in corporate earnings (Nifty earnings up 10% in FY23 on a high base of 38% in FY22) and expectations of high-teens earnings CAGR over FY23-25E have kept the sentiment buoyant.

* Over FY20-23, the MOFSL Universe posted an earnings CAGR of 26% to reach INR8.3t, whereas the Nifty-50 reported an earnings CAGR of 22% to reach INR6.2t. The earnings momentum is likely to remain strong going ahead with MOFSL/Nifty-50 earnings projected to clock 21%/19% CAGRs over FY23-25E.

* The Nifty-50 saw a CAGR of 11%/12%/13% in 1-year/5 year/10-year periods.

* NTPC, Coal India, Cipla, L&T and TATA steel were top performers, while Britannia, Eicher, HUL, HDFC Bank and Nestle were the key laggards during Nifty's 19k to 20k journey (during Jun’23- Sept’23). 

Celebration is broad-based this time!

* Though the Nifty-50 is at an all-time high, Mid and Small-caps have outperformed by a big margin. In CY23YTD, the Nifty-50 is up 11%, whereas the Nifty Midcap 100 and the Nifty Smallcap 100 are up 28% and 29%, respectively.

* The large caps remained clear outperformers during the Nifty-50’s journey from 18k to 19k. However, the mid and small caps hit new highs when the Nifty-50 moved up from 19k to 20k.

* As the rate-hike cycle seems over and with positive retail sentiment, the mid and small caps remain in favor. This was evident in the recent broad-based market rally, when both mid- and small-cap indices rose ~13% and 16%, respectively, outperforming the Nifty-50 by a wide margin of 780bp and 1,150bp, respectively, during Jul’23 to Sep’23 (when Nifty moved from 19k to 20k).

Valuations remain reasonable vs. CY21 high

* As the benchmark soars to a new high, the Nifty-50 trades at a 12-month forward P/E of 18.8x, a 7% discount to its own long-period average (LPA). Further, it also trades at a 12-month forward P/B of 3x, a 6% premium to its LPA.

* Notably, Nifty EPS grew ~19% over FY20-23 to INR807 vs. market returns of ~15% over Jan’20-Sept’23. Thus, valuations are far more reasonable today than they were in Oct’21 highs.

* Although the Nifty-50 is at a new high and is creating a lot of buzz, on a two-year basis, it is up ~7% from the Oct’21 high. Its aggregate FY22/FY23 earnings are up ~38%/10%, while MOFSL Universe earnings are up 39%/10% in FY22/FY23.

* We reckon the upside from here will be a function of stability in global and local macros and continued earnings delivery vs. expectations.

* Moreover, we note that during the last five General Elections (1999-2019), the Nifty-50 rallied 10-32% six months prior to the announcement of election results. India will be going into General Elections in Mar-May’24

Exhibit 1: Nifty journey from 1k to 20k

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