The recent report from Bernstein provides a detailed evaluation of the Indian stock market, shedding light on the increased interest of investors in Indian stocks. However, the surge in stock prices seems to be driven more by greed than rational decision-making. The report specifically focuses on assessing the growth potential of approximately 90 stocks across 14 subsectors.
In January 2024, Bernstein examined the “implied growth” of the Nifty50 and MidCap 100 indices, revealing that both indices are currently at historic highs. While the Nifty is expected to grow by 13%, the MidCap 100 is projecting a 20% free cash flow (FCF) compound annual growth rate (CAGR) over the next 15 years. Despite these optimistic projections, there is a noticeable weakness in earnings support, particularly among midcap companies where the two-year earnings per share (EPS) growth lags behind long-term growth prospects.
Valuation and Earnings Discrepancy
The analysis from Bernstein also highlights a significant shift towards higher implied growth zones within their stock spectrum since March. The average implied growth has increased to 15.5% from 14.3%, indicating a growing mismatch between valuations and earnings growth. Certain sectors like staples continue to dominate the high-valuation territory, while others such as pharma and auto remain within the trend line zone. Sectors like healthcare, industrials, and telecom have become more selective in terms of valuation.
Valuations have risen across nine of the 13 sectors evaluated, even when the base is shifted to FY26. Sectors like telecom, IT, and consumer discretionary have experienced a decline in implied expectations and are currently below the past decade’s EBITDA CAGR. On the other hand, sectors like metals and transport have implied growth expectations below near-term forecasts, while autos, healthcare, and cement align with near-term growth prospects. Certain sectors like staples, utilities, and energy are priced higher than their near-term delivery capabilities.
Investor Enthusiasm and Market Trends
The surge in stock prices can be attributed to strong retail inflows providing liquidity, despite foreign institutional investors (FIIs) exercising caution. The market is experiencing a phase of forced investing due to this liquidity, making it challenging for investors to make significant purchases at current levels. The initiation of IPOs and stake sales suggests a trend towards monetizing wealth and transferring risk to public markets.
While sectors like consumer discretionary, IT, telecom, metals, and transport offer potential opportunities, the bottom-up plays are becoming scarcer. Recommendations for specific stock picks can be found in Bernstein’s India Portfolio, which provides insights into companies aligning near-term growth with long-term expectations. It is essential for investors to rely on detailed analyses like Bernstein’s to identify sustainable investment opportunities in the current market scenario.
The Indian stock market is currently experiencing a phase where investor enthusiasm is driving valuations beyond rational expectations. With certain sectors showing signs of overvaluation, it is imperative for investors to navigate these waters cautiously, leveraging in-depth research and analysis to make informed investment decisions.