The Indian stock market has been caught in a bear hug. The Nifty 50 is set to post losses for the fifth straight month—a trend we haven't seen since 1996. Unlike previous sharp corrections though, this downturn has been a slow bleed, with red ink drip-dripping across the charts every month.
Just six months ago, the mood was very different. Markets were hitting record highs. It seemed like stocks could only go up.
A mix of heavy FII selling, earnings downgrades, and global uncertainty, especially from the US, sent the market into reverse. If you poured in money during the highs, well, let’s just say that it hasn’t been the most rewarding stretch.
As the joke goes, "Everyone becomes a long-term investor in a falling market."
So with this extended correction, have valuations finally become attractive, or are stocks still overpriced?
To get a clearer picture, we turned to Trendlyne’s Historical PE Analysis tool to see where things stand for the Nifty 50, Nifty Midcap 100, and Nifty Smallcap 100.
Let’s dive in.
In this week’s Analyticks,
- Valuation check: The benchmark Nifty 50 index turns attractive
- Screener: Stocks which beat Q3 Forecaster estimates for revenue and net profit with high revenue and EPS growth expectations for Q4FY25
Nifty Midcap 100 wins in the long run, but there are risks
The recent market correction has dragged the major indices down from their peaks. The Nifty 50 and Nifty Midcap 100 have entered the correction zone after falling over 10% from their highs, and the Nifty Smallcap 100 has crossed the 20% loss mark (bear market territory).
Nifty Midcap 100 outperforms peers in long term gains
Despite these short-term setbacks, the Nifty Midcap 100 has proven its strength over the long run, outperforming both the Nifty 50 and the Nifty Smallcap 100. But this impressive performance comes with heightened valuation risks.
Sankaran Naren, Chief Investment Officer of ICICI Prudential Mutual Fund, said in an event on February 12, “India has one of the best macros in the world compared to other countries, but our smallcap and midcap valuations are absolutely absurd right now”. He asked investors to pause their SIP in the current environment.
However on Monday, Citigroup upgraded its rating on Indian stocks from ‘neutral’ to ‘overweight’, pointing to improving consumer sentiment, expected rate cuts, and minimal exposure to US trade risk.
Midcaps shine, but earnings struggle
The Nifty Midcap 100 has historically commanded a higher price-to-earnings (PE) ratio, due to the stronger growth potential of its companies, which are seen as mid-sized and fast-growing. At 33.9, it has the highest PE among the three major indices.
But this elevated PE is also due to a sharp drop in its earnings per share (EPS) in Q4FY24.
Nifty 50 PE falls 12.2% in the past year, while Nifty Midcap 100 PE surges 33.2%
The Q3FY25 results did not help the Nifty Midcap’s EPS recover to the March 2024 level. Companies like Oil India (Oil and gas), Petronet LNG (Oil and gas), and Oracle Financial Services (Software and services) reported sharp falls in their EPS. As a result, the Nifty Midcap continues to trade at a high PE.
Analysts see Nifty 50 as the most promising, backed by historical data
Like the Nifty Midcap, the Nifty Smallcap 100 is also trading at a premium compared to its 10-year average. Nifty Midcap 100 and Smallcap 100 both beat the Nifty 50 in revenue growth - they posted a Q3FY25 revenue growth of 8.2% and 8.7%, outpacing Nifty 50’s 4.5% increase.
But indices with high PE ratios are more vulnerable to market downturns, as seen in the past quarter. The Nifty Midcap 100 and Nifty Smallcap 100 both suffered steeper losses than the Nifty 50.
In comparison, the Nifty 50 appears more reasonably valued. Its current PE is below its historical averages, and its forward PE of 19 makes it even more appealing.
Buy zone?: 1 year forward PE of indices below current PE
Beating the bears: Midcaps dominate the list of top performers
The top-performing midcap companies have held on to their gains over the past year, even as the broader market has faced turbulence.
In contrast, smallcap stocks have taken a big hit since the correction began, wiping out the triple-digit returns that once dominated the Nifty Smallcap 100. This has especially hurt large investors who specialize in smallcaps, like Ashish Kacholia.
Top performers in Nifty Midcap 100 outperform large and Smallcap cos
Midcaps have emerged as clear winners, with all the top five stock market performers in the Nifty Midcap 100. In the Nifty 50, the auto sector has stood out, with Mahindra & Mahindra and Eicher Motors securing two of the top five spots.
Foreign institutional investors (FIIs) have been selective in their bets. Only five companies across the three indices saw FII holdings increase by over 3% in Q3FY25: IDFC First Bank, Voltas, BSE, PNB Housing, CDSL, and Chambal Fertilisers. And none of these companies are in the Nifty 50.
Worst-performing stocks: some investors are feeling the pain
The Nifty Smallcap 100 has struggled in the past year, with only 43% of its stocks delivering gains. The Nifty Midcap 100 and Nifty 50 have fared slightly better, with 53% and 50% winner-to-loser ratios, respectively.
Four companies across the three indices have lost nearly half their value. Hopefully, none of your portfolio picks are on this list—Mangalore Refineries (falling profits), Vodafone Idea (loss-making), Sterling and Wilson (PE of 234), Tanla Platforms (falling profits) and Sonata Software (falling margins).
Five companies in the Nifty Smallcap 100 lose nearly half their value in the past year
In the Nifty 50, Adani Enterprises takes the unwanted top spot as the worst performer, shedding a third of its value over the past year.
The market correction has affected all the major indices. While midcaps have outperformed over the long term, their high valuations and recent earnings struggles raise concerns. Large caps appear more reasonably valued and could offer a safer bet amid market uncertainty.
But foreign brokerages like Citi and Jefferies are turning bullish on Indian markets, citing Nifty 50's attractive valuation at 19x forward earnings, which is below its historical averages.
Looking ahead, factors like good Q4 earnings, rate cuts and FII interest could provide some support. But the red flags of elevated valuations in mid and small-cap stocks are still there.
Screener: Stocks which beat Q3 Forecaster estimates for revenue and net profit with high revenue and EPS growth expectations for Q4FY25
Stocks beating Forecaster estimates are from diverse sectors
With the end of the Q3FY25 results season, we look at stocks that outperformed expectations during the quarter, that also have high growth estimates for Q4FY25. This screener shows stocks which beat Trendlyne's Forecaster estimates for revenue and net profit in Q3FY25, with high revenue and EPS YoY growth expectations for Q4FY25.
The screener consists of stocks from the aerospace & defence, cement & cement products, commercial vehicles, consumer electronics, IT consulting & software, and pharmaceuticals industries. Interesting stocks in the screener are Bharat Electronics, Ambuja Cements, Indian Hotels Company, Ashok Leyland, Blue Star, APL Apollo Tubes, Bajaj Finance, and Bharti Airtel.
Bharat Electronics features in the screener after beating Forecaster estimates for revenue and net profit by 17.4% and 37.3%, respectively, in Q3FY25. This aerospace & defence stock’s revenue and net profit grew 37.6% YoY and 52.5% YoY, respectively. Revenue growth was supported by a strong order book of Rs 71,100 crore and an order inflow of Rs 11,000 crore during 9MFY25.
Analysts at Motilal Oswal expect the company’s revenue to surge on the back of large-sized order inflows from quick reaction surface-to-air missile (QRSAM) and next-generation corvettes. However, the focus will shift to order execution. Any delays can hurt the company’s top and bottom line.
Indian Hotels’ Q3FY25 revenue and net profit beat forecaster estimates by 4.3% and 1.1%, respectively. This hotels stock’s revenue increased by 29.4% YoY, driven by an improvement in the food & beverage and new business segments, rising average room rate (ARR), and occupancy.
Its net profit jumped by 28.9% YoY, led by improving margins in the new business segment and a recovery in US subsidiaries. Axis Direct expects the company’s revenue and net profit to grow on the back of a low supply of rooms and an increase in Foreign Tourist Arrivals (FTAs), which positively impact ARRs.
You can find more screeners here.
