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Optimism around India’s growth prospects, sound fundamentals, robust earnings and policy continuity led to FIIs returning to India, which with greater domestic participation helped fuel the 20% rally for the Nifty 50 in CY23. This has pushed market valuations to peak levels and our proprietary framework ‘What’s in Price? (WSIP)’ is now capturing in extreme optimism, with 45% of the stocks within BSE200 universe trading in 75-100% Long Term Growth Value (LTGV) bucket.    

Markets attributing LTGV in peak range…

Markets are pricing in long-term growth at historically high level, with LTGV for BSE200 at an unprecedented 63%, 1162bps above its long-term average, indicating overheated conditions. This rise in LTGV has mainly come at the expense of the Current Business Value (CBV), while short-term growth value (STGV) has held up. We expect the market to remain range-bound in the near-term, with intermittent bouts of volatility amid profit-taking.

…but Nifty better placed

However, the Nifty appears more favorably positioned, with its LTGV at 61%, lower than both BSE200 and Nifty Midcap 100, suggesting lesser speculation priced in. Value distribution in the LTGV also favors Nifty, with 26% of the companies in value zone (<50 LTGV bucket) versus 22% in BSE200.

Energy in sweet spot; Banks baking in long-term earnings

Energy’s LTGV has expanded into positive territory after being negative for the past four years. Tailwinds such as: (a) favorable government policies, (b) beneficial global market dynamics and (c) shift towards sustainable energy suggest strong outlook.

Conversely, we see Banks to continue facing challenges in the near term, including profitability pressures and declining margins. The sector’s current valuations include significant long-term expectations, which given the sectoral headwinds and low margin of safety might lead to a cautious outlook.

PSUs – Cautious optimism

The PSU sector's rally has pushed valuations to near-peak levels, with optimism reflected in expansion of LTGV. Historical trends suggest potential pre-election gains, but peak valuations warrant caution. Strategic disinvestments could unlock further value, offering a cautiously optimistic outlook with selective opportunities post-elections.

MPOP – Stocks with strong fundamentals and attractive valuations

High-ROE companies usually command higher market valuations due to their superior value generation for shareholders. Despite a market with generally high valuations, undervalued opportunities exist among companies with high spreads but are trading at the lower end of their LTGV range. We focus on BSE200 companies in the highest spread quintiles and lowest LTGV range quintiles, further refining our picks to those with ‘Buy’ or ‘Accumulate’ ratings for portfolio outperformance.

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