As we delve into the current dynamics of the Indian stock market, it’s crucial to understand the intricacies involved. Bernstein’s latest report offers a comprehensive look at the landscape, highlighting the heightened enthusiasm of investors flocking to Indian stocks. However, this surge is often driven more by greed than rational decision-making.
When ambitious visions become widely accepted, navigating these waters becomes even more challenging. Thus, making relative calls is essential. The report evaluates approximately 90 stocks across 14 subsectors, focusing on long-term growth expectations embedded in their valuations.
In January 2024, Bernstein assessed the “implied growth” for the Nifty50 and MidCap 100 indices, finding them at historic highs. The Nifty is expected to grow by 13%, while the MidCap 100 anticipates a 20% free cash flow (FCF) compound annual growth rate (CAGR) over the next 15 years. However, earnings support is weak, particularly for midcaps, where the two-year earnings per share (EPS) growth lags behind the long-term implied growth. This discrepancy suggests that midcap stocks are currently the most overvalued.
Since March, there’s been a notable shift towards higher implied growth zones within Bernstein’s stock spectrum. The average implied growth has increased to 15.5% from 14.3%, even as the average EBITDA CAGR for FY24-26 decreased from 20% to 18%. This indicates a mismatch between valuations and earnings growth, with staples continuing to dominate the high-valuation territory. Meanwhile, sectors like pharma and auto remain within the trend line zone, and lower valuation sectors, such as healthcare, industrials, and telecom, have become even more selective.
