Mumbai: As equity market hovers near record high levels, the valuations in various sectors have been pushed into an expensive zone, making the risk-reward ratio uncomfortable in sectors such as corporate banks, telecom, NBFCs (non-banking finance companies) and consumption-based stocks.
BSE’s 30-share Sensex closed 0.32% higher on Thursday to a record close of 33,147.13 points, while National Stock Exchange’s 50-share Nifty closed 0.47% higher at 10,343.80 points.
Sensex trades at 24.49 times 1-year forward price to earnings (P-E), compared to a five-year average of 18.82 times. Nifty, meanwhile trades at 26.36 times 1-year forward P-E , significantly higher from its 5-year average of 18.37 times.
“The surge in stock prices of corporate banks and telecom stocks over the past few days and the continued strong performance of metal stocks further reduce the overall investment reward-risk balance,” Kotak Institutional Equities said in a note on Thursday.
“For investors with large positions in the above-mentioned sectors, it would make sense to book some profits at current levels,” Kotak analysts Sanjeev Prasad, Sunita Baldawa and Anindya Bhowmik said in a note.
BSE telecom index is trading at an exorbitant valuation of 303.93 times 1-year forward P-E, compared with a 5-year average of 61.39 times. BSE Bankex trades at 19.81 times 1-year forward P-E, up from a 5-year average of 13.30 times.
“The financial sector, specifically NBFCs, and most of the consumer space is expensive. The mid-cap index is significantly expensive—probably at unprecedented levels,” said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd.
BSE mid-cap index also scaled a record high on Thursday. It has been trading between 21 times 1-year forward P-E and nearly 23 times 1-year forward P-E, the highest since at least June 2013.
“One should tread cautiously,” warned Sinha, adding that earnings are lagging behind, and markets have rallied, and visibility of earnings growth is still missing.
The rich valuation of consumption stocks such as staples, discretionary and financing of consumption and mediocre performance of export sectors such as IT and pharmaceuticals make it difficult to construct a portfolio with a judicious mix of stocks with good reward-risk balance across sectors, said Kotak analysts.
A few, however disagreed, and felt even if valuations looked stretched, there was probably no looking back for the market leaders.
“Every rally will have leaders and they will always look expensive from the start of the rally to the end of it, but will continue to grow defying immediate fundamentals and discounting future positives on the back of strong growth potential,” said Gaurav Dua, head of research at Sharekhan by BNP Paribas.
“We see a lot attraction towards consumer-facing stocks such as private banks, discretionaries, FMCG, NBFCs. These are the spaces which have been leading the growth, and the story remains intact,” added Dua.