Where Is Value Emerging In Equity?

There is wide dispersion in valuation metrics across sectors and even within companies.

- MAHESH PATIL

We have seen high volatility in the market over the past few months, and the divergence seen in 2018 has continued into 2019. While headline indices such as the Nifty are holding up, the broader market has seen significant correction, and good value is emerging out of equity markets. It is an opportune time for investors to understand these pockets of value and position their portfolios appropriately, to capture the upside over a horizon of 3-5 years.

If we look at the large-cap Nifty 50 index, headline valuations seem reasonable, with the yield gap ratio close to its long-term average and the price to earnings (PE) ratio at a slight premium to its long-term average. However, there is an evident dichotomy with the top 10 highest-valued stocks in the Nifty trading at an average PE level of 30x, while the balance 40 stocks are trading at half that valuation (i.e., their average PE is 15x). These companies are not in favour currently due to concerns on short-term growth. But many of them have sound business models, strong balance sheets and good corporate governance, and should bounce back once we see initial signs of recovery in the economy.

For mid- and small-cap indices, valuations are attractive, with PE ratios close to, or below, their long-term average and at a 20-25 per cent discount to the large-cap index. Many mid- and small-cap companies have seen a fall of 4050 per cent over the past 18 months, and in quite a few cases, this has occurred without any significant change in their business fundamentals. This segment is showing signs of having bottomed out, but in a market upturn, it can outperform the large-caps.