Nearly Half Of The Nifty 50 Constituents Still Trade At A Discount To Their Historical Average, Says Motilal Oswal

Most private lenders like HDFC Bank and Axis Bank, and auto stocks like Maruti and M&M are among the 22 Nifty 50 constituents that are still trading at a discount to their 10-year average valuations, according to the latest report by brokerage firm Motilal Oswal. The note comes at a time when the Nifty 50 index is just 300 points away from re-testing its previous all-time high of 18,887.6.

The Nifty 50 index gained for the third straight month in May. The index not only reversed its losses for the year but is again close to its record high. The index is up 2.2 percent on a year-to-date basis, with stocks like Tata Motors (up 36 percent), ITC (up 34 percent), and Bajaj Auto (up 26 percent), among the top performers.

The Nifty 50 itself is trading below its long-period average. The MSCI India index has outperformed the MSCI Emerging Market Index over the last 12 months, as well as the last decade.

Among stocks that are still trading below their 10-year average are auto stocks like Eicher Motors, Hero MotoCorp, Mahindra & Mahindra, and Maruti Suzuki. While M&M made a record high on Monday, the rest are also trading close to their 52-week high. The Nifty Auto index is also at a record high.

“We believe two-wheeler volumes should continue to see sequential growth, led by a recovery in rural demand and a pickup in exports,” the Motilal Oswal note said. “Underlying demand drivers remain intact and should aid healthy growth in MHCVs.” The brokerage also expects tractor volume growth in the financial year 2024, despite the high base, while the industry is cautiously optimistic.

Drugmakers like Cipla, Dr Reddy’s and Sun Pharma, along with India’s largest hospital chain Apollo Hospitals, also feature in this list. Both Cipla and Sun Pharma have been underperformers this year, while Dr Reddy’s and Apollo have seen gains of 9 percent and 11 percent so far year-to-date.

When compared on a price-to-book basis, many private lenders, which have had a major hand in propelling the Nifty Bank index to new records, are trading below their 10-year average. However, ICICI Bank, which has been a bigger outperformer, is not part of the list. Life insurance players like HDFC Life and SBI Life also trade below their historical averages.

Most metal names have been underperformers so far this year and the Nifty 50 metal names are not isolated either. Barring Coal India, all three majors – Tata Steel, Hindalco, and JSW Steel have seen negative returns so far in 2023. All four are part of the list of those trading below their historical valuations. With the exception of Tata Steel, the other three stocks are trading at a discount between 35-53 percent of their historical average.

Since March, the Metal stocks have been under pressure due to a weaker-than-expected revival in China and weak global sentiment. Both domestic HRC prices and Rebar prices are down by over 3 percent on a month-on-month basis. The sector is also trading at an EV/EBITDA ratio of 5.3 times, below its 10-year historical average of 6.6 times. On a price-to-earnings basis as well, the sector is trading at 8.8 times, compared to the historical average of 11 times.

Other names like ONGC, UPL and UltraTech Cement complete the list. While these 22 names are trading below their 10-year average valuation, there are some names that are trading at a significant premium to their historical averages. Prominent among them are Divi’s Labs (51 percent), Grasim (47 percent), Reliance Industries (45 percent), Nestle (24 percent), and Tech Mahindra (23 percent).