Is market valuation of any relevance?

It is interesting to note that while the popular stock market indices such as the S&P BSE Sensex and Nifty 50 are just a shade lower than their all-time highs, valuations are still not seen as expensive, even as corporate earnings have been muted for three years in a row. This is where a Kotak Institutional Equities report led by Sanjeev Prasad throws light on some insightful facts, and more important, could be a warning signal for investors. “The valuations of the Indian market look reasonable on a top-down basis but the valuations of individual stocks are super-expensive or fairly valued in most cases. The high weightage of low P/E PSU banks, commodity stocks and utilities in the broader market indices pulls down the overall valuations,” the analysts note. Future & Option Trading Tips  

It may be tempting to derive solace from top-down (broader indices) market valuations, but it would be more rewarding to disregard indices and focus on bottom-up (stock specific) challenges, the analysts highlight. A look at the sectoral break-up shows just four sectors are trading below the Nifty-50 valuation of 16.7x, based on 12-month rolling forward earnings estimates. These include technology, utilities, energy and metals. The remaining nine sectors are trading at a huge premium to the Nifty-50, given their price-to-earnings (P/E) valuation ranging 18-43x (see chart). The contribution of banking, energy, metals and technology to the combined profit of Nifty-50 companies is pegged at 68 per cent for FY17, and excluding technology, the other three are expected to drive a large share of incremental earnings in FY16-19. All of them are trading below Nifty-50 valuation levels, except banking, which is a tad higher than the broader index. Financial Astrology Tips