Nuvama Institutional Equities in a fresh strategy note said domestic stock market’s high valuations and slowing profits are inverting buyer-seller incentives, with promoters and PE funds are on a selling spree, whereas domestic flows are slowing.
While FII flows are now critical, India’s appeal among emerging markets is fading given a high valuation premium amid a blunted earnings edge, the domestic brokearge said.
“Essentially sellers are stimulated while buyers bide their time. This risks stalling an ageing bull market,” it said adding that caution is particularly warranted in smallcaps and midcaps (SMIDs) given their larger valuation-earnings wedge.
Nuvama said SMIDs are vulnerable in the current market setup, with their valuation premium over large-caps at a record 45 per cent, even as the earnings differential has disappeared. It has Coforge, Ajanta Pharma, KEI Industries, Sun TV, Mahanagar Gas (MGL), Schaeffler India and Motherson Sumi Wiring, among others, as its top SMID picks.
“With margin tailwinds behind and demand weak, earning recovery will entail a fresh round of easing. It must begin with the Fed as dollar weakness so far has not been reflationary, complemented by domestic fiscal as well as monetary expansion. But size and timing are of essence,” Nuvama said.
As Nifty and SMIDs bounced 12 per cent and 20 per cent from April low amid earnings downgrades, this has led to an unprecedented wedge between growth and valuation, with the BSE500 median PE at 40 times while trailing median earnings growth is just 9 per cent.
Nuvama argued that is unsustainable and skews the buyer-seller incentive structure decisively in the latter’s favour. The brokerage is betting big on consistent compounders, calling them re-investors.
The domestic brokerage highlighted that insiders have sold $15 billion of equities and came out with fresh issuance of $3 billion, recently. Historically, such supply has coincided with market peaks.