60% Nifty firms trade at premium compared to 10-year PE average; should you bet on winners?

Nifty recuperated and staged an impressive comeback in April, but it is still down more than 20 percent from its recent high of 12,400 levels.

In terms of valuations, Nifty trades at 12-month forward P/E of 19.3x, at 4 percent premium to its long-period average of 18.6x. The Nifty’s P/B of 2.2x is below its historical average of 2.6x (13% discount).

It is not just Nifty, but 60 percent of the Nifty50 companies that are trading at a significant premium to long term average, according to a note by Motilal Oswal.

The Nifty’s 12-month trailing P/E of 20.4x is trading at a 4 percent premium to its long-period average of 19.6x. At 2.4x, the Nifty 12-month trailing P/B is well below the historical average of 2.8x.

Companies trading at a significant premium to their historical averages: Nestle (+68%), Reliance Industries (+56%), Britannia (+54%), Asian Paints (+53%) and HUL (+51%), said the Motilal report.

And, the companies trading at a significant discount to their historical averages: Zee (-69%), Bharti Infratel (-51%), NTPC (-51%), ITC (-46%) and IOCL (-43%), it said.

A display of strength and being leaders in their respective sectors – companies which are trading at a premium to their averages is a bullish sign for them, but not all companies could be termed buy, suggest experts.

“The above-mentioned names always trade at a premium to their historical averages as they are being the leaders in their product categories, zero debt, generate strong free cash flows and holds superior brands of their sector,” Vikas Jain, Senior Research Analyst at Reliance Securities told Moneycontrol.

“The broader markets have seen a sharp correction so these stocks look more expensive in co-relation to the earnings of the overall markets. There has been individual stock price correction like HUL and Asian Paints in recent weeks which gives an opportunity to invest in these high-quality franchisees,” he said.

What should investors do?

In these uncertain times of COVID-19 pandemic investor always prefer defensive companies which have low variation in terms of their earnings forecast, higher dividends and lesser volatility in their portfolios, suggest experts.

There will always be some companies that will trade at significant premiums because of strong fundamentals or robust business models, but given the fact we are staring at a recessionary phase, the story will change as economic reality hits D-Street.

“As an investor, it is not a good proposition to currently invest in these stocks, especially when larger markets are staring at a recession, because they are trading at high valuations,” Nirali Shah, Senior Research Analyst, Samco Securities told Moneycontrol.

“Once there is a clearer picture on the ground reality issues investors should begin investing in stronger names. Till then a wait and watch approach would be better,” she said.

The fact that the listed companies are trading at significant premiums to their historical averages, these firms also hold good fundamentals and can provide an opportunity to generate decent returns but in the long term as the short term, story is likely to remain volatile.

“Investors should remain cautious of the fact that markets may continue to remain volatile in the near future and short-term bullish actions may be riskier,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.

“Long term investing may be beneficial in the above-mentioned stocks considering their attractive valuations. Investors should invest with a long-term view,” he said.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.