The Indian equity market is scaling new highs with the Nifty trading above the 16,200 level boosted by optimism over the opening up of the economy, better than expected June quarter corporate earnings, and a pick-up in vaccinations.
The Indian market has outperformed its global peers, and the US is the only market trading at a premium, while other key markets continue to trade at a discount to India.
In the last 12 months, midcaps have risen by 80 percent as compared to a 42 percent rise for the Nifty. In the last five years, midcaps have outperformed by 6 percent.
In P/E terms, the Nifty Midcap 100 is trading at a 3 percent premium Nifty. The midcaps trade at a 3 percent premium to largecaps.
Analysts believe the valuations of the Nifty seems to be expensive after the recent outperformance as compared to emerging markets.
"The Nifty trades at a 12-month forward P/E of 20.5x, at an 8 percent premium to its LPA. P/B, at 3x, is at a 19 percent premium to its historical average. The 12-month trailing P/E for the Nifty, at 26.1x, is at a 28 percent premium to its LPA of 20.3x. At 3.4x, Nifty’s 12-month trailing P/B is above its historical average of 2.8x," domestic brokerage firm Motilal Oswal said in a report.
It noted that about 55 percent of the Nifty constituents trade at a premium to their historical averages. Among sectors, two-thirds of sectors are trading at a premium to their averages, it said.
Meanwhile, India’s market capitalisation-to-GDP ratio has been volatile, touching 56 percent (FY20 GDP) in March 2020 from 79 percent in FY19. It has rebounded to 104 percent at present (FY22E GDP) – above its long-term average of 79 percent.
Further, India’s share in the world market cap stands at 2.7 percent – above its historical average of 2.4 percent. Over the last 12 months, the global market cap increased by 35.5 percent ($30.5 trillion), while India’s market cap rose 59.7 percent.
Among large-cap stocks, ICICI Bank, SBI, Infosys, HCL Technologies, UltraTech Cement, M&M, Hindustan Unilever, Titan Company, Divi’s Laboratories, SAIL, and SBI Cards are Motilal Oswal's top pics.
Among mid-caps, its top picks include Max Financials, Cholamandalam Finance, JK Cements, Indian Hotels, Deepak Nitrite, Burger King, ICICI Securities, Orient Electric, Solara, and Aditya Birla Fashion and Retail.