India Strategy : Where Money Flows - Jun 2024 by Yes Securities
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Heavyweights Underpin Broader Markets
Indian Equity indices have recently achieved new highs, accompanied by a widening market breadth, indicating broad-based participation across sectors. In light of these developments, we analyze the earnings revisions and valuations across various sectors.
Methodology: For this study, we selected a basket of 388 stocks based on two primary criteria: 1) Stocks with a minimum 3-year history of revisions in earnings estimates. 2) Analyst Coverage: Each stock in the basket is covered by at least 3 analysts. These 388 stocks are distributed across 20 different sectors, allowing us to provide a sectorspecific analysis of earnings and valuations.
Heavyweight Sectors Below Historical Averages
* Banks and Financial Services: Despite recent market highs, banks are trading below their historical average valuations. This could indicate potential undervaluation and opportunities for growth. Like Banks, Financial services stocks are also below their historical averages, suggesting a lag in valuation metrics.
*IT: The sector continues to trade below its historical average, potentially offering value opportunities as it catches up with market trends.
* Sectors with Elevated PE Ratios: Metals & Chemicals are buoyed by expectations of solid recovery in earnings.
Market Cap Classification Valuation
*Large Caps: The 1-year forward PE multiples for large-cap stocks are in line with their 3-year averages, indicating stable valuation trends for this segment.
* Mid-Caps and Small Caps: These segments are trading above their 3-year average PE multiples, suggesting higher investor confidence and potentially overextended valuations in these categories.
Earnings Upgrades
Approximately 32% of the stocks in our study have witnessed earnings upgrades of more than 2% for FY25 in the last 6 months. Oil & Gas, followed by Financial Services has seen the highest number of earnings upgrades
Conclusion:
* Heavyweight sectors are trading below their historical valuations, combined with strong earnings momentum, which suggests that a significant correction in Benchmark indices is unlikely.
* However, Small cap / Mid Cap Names are experiencing a case of PE expansion amid some softening in growth momentum, which can translate into correction on stock specific basis.
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