Indian stocks are starting to look less expensive, going by a much-watched valuation indicator, though there could be more earnings downgrades in small- and mid-cap stocks.
Modi trade falters ahead of Maharashtra assembly polls
Stocks that were expected to gain from Prime Minister Narendra Modi’s economic policy agenda earlier this year are struggling ahead of the crucial Maharashtra state poll. An index tracking these so-called ‘Modi stocks’ is up just 4% in 2024, after rising over 30% at one point during the year. A loss for the Modi-led Bharatiya Janata Party alliance could worsen the sentiment, as investors fear the administration may turn to more populist policies and scale back spending on infrastructure. Even a victory may not dramatically turnaround their fortunes, given the prevailing bearish market mood.
Cheaper gas cuts to pinch urban consumers
The latest cut in cheaper gas allocation to distribution companies is bad news for consumers. City-gas companies will now need to buy from the open market, likely at higher prices, and pass on the additional costs to users. With urban consumption already under pressure, higher utility bills could force consumers to tighten their purse strings even further. Analysts at Citigroup Inc and Morgan Stanley also see a hike in the prices of gas as retailers debate growth and margins.
Room for downside for smaller stocks
Small-cap and mid-cap stock indexes have fallen as sharply as the benchmark Nifty 50 Index, despite a higher proportion of earnings downgrade in these segments compared to large caps. About 77% of mid-cap and 64% of the small-cap stocks covered by JM Financial Securities saw earnings estimates cut, versus 61% for the frontline peers. This suggests that the broader swathe of India’s equity market remains expensive relative to their fundamentals.
Analysts actions
Mahanagar Gas Raised to Add at Avendus Spark; PT 1,275 rupees
Century Ply Cut to Hold at JM Financial; PT 800 rupees
Nazara Tech Raised to Buy at Dolat Capital; PT 1,100 rupees
And, finally..
Indian equities are starting to appear less overvalued versus the nation’s sovereign debt as the stock selloff extends into its eighth week. The so-called BEER ratio, which tracks the relationship between 10-year government bond yields and BSE Sensex earnings yields, has fallen below its long-term average. While the ratio still favors equities, it is nearing its one standard-deviation level for the first time since 2020.