The Indian market's high valuations are underpinned by (1) the euphoric sentiment among non-institutional investors (price-agnostic bidders), (2) a strong macroeconomic position and (3) a decent earnings outlook. 1QFY25 results provided positive evidence of modest recovery in outsourcing (IT services) and consumption, but belied growth expectations in some cases.
Fair, full, frothy valuations
We do not find much value in the Indian market, with parts of the market trading at (1) fair valuations (financials), (2) full valuations (consumer, healthcare, IT services, pharmaceuticals) and (3) frothy valuations (investment, most PSUs). The valuations of the large-cap. indices are very misleading, as they hide large pockets of overvaluation, with massive misalignment between price and value.
Tall edifice of market on strong (or weak) foundation of retail investors' faith
In our view, the fair-to-frothy valuations of the market reflect (1) the euphoria and irrational exuberance among non-institutional investors and (2) passive acceptance of the high valuations among institutional investors for various qualitative reasons. The former set of 'investors' expect large returns from the market at all price points, based on their experience over the past 3-4 years. The latter set seems to have accepted that the former lot will continue to stay bullish and bid stocks at all price points (hence, price-agnostic bidders) and thus, they have a more expansive view of valuations.
Macroeconomic position strong; modest improvement in laggard sectors
India's macroeconomic position continues to be quite strong, with (1) a strong growth and BoP (currency) outlook and (2) a moderate, but improving fiscal and inflation (interest rates) outlook. 1QFY25 results and management commentary highlighted modest improvement in the laggard sectors of IT services and consumer staples. We expect continued improvement in the affordability equation for low-income households, driven by a combination of (1) a period of relatively stable product prices, after 4-5 years of relentless price increases and (2) a modest increase in household incomes.
1QFY25 results in line with expectations; beats rewarded, but misses ignored
1QFY25 net income of the Nifty-50 Index grew 5.2% (3.1% adjusted for HDFCB), moderately ahead of our expectation of 1.3% growth and 1QFY25 net income of the KIE coverage universe grew 3% (1.5% adjusted for HDFCB), ahead of our expectation of 1.3% decline. The positive surprises came from BPCL, COAL and ONGC. The weak yoy performance reflects the high base of oil marketing companies in 1QFY24. The 1QFY25 EBITDA of the Nifty-50 Index grew 3.2% versus our expectation of 0.6% growth. However, earnings are less relevant in the current sentiment-laden market, with the market rewarding modest beats in certain cases (IT service, as an example) and ignoring large misses (APNT and JSTL being two prominent cases) in 1QFY25. |
