Nifty Is At Risk From Consumer, Financial Stocks With Pricey Valuations
Expectations are running high and so are valuations. Even a slight fall in earnings can derail some of these heavyweights.
The Nifty 50 Index is trading at nearly 18 times its fiscal 2024 earnings—but a third its constituents contribute a chunk of that. And that’s where the risk lies for the benchmark.
Analysts have penciled in aggressive earnings growth for the next financial year. That's when a global slowdown, rising inflation and tightening interest rates threaten to put brakes on consumption and growth plans.
The Reserve Bank of India has already downgraded India’s GDP growth estimate three times since the beginning of the financial year, with expansion pegged at 7% for the full year and sub-5% in the second half ending March 2023. High inflation and rising cost of capital are risks to earnings of consumer and financial companies.
Against this backdrop, the risk for Nifty 50 emerges from 16 companies that trade more than 25 times their estimated earnings for FY24. These stocks account for 28% of the weight for the benchmark.
A high PE multiple underscores potentially high earnings growth estimated by the street for these companies. An earnings miss or a downgrade will bring down the price of the stocks to adjust to their expected revised earnings growth. And that, in turn, will drag down the valuations of the companies.
These 16 companies on an average trade at more than 50 times their forward earnings, according to BQ Prime's analysis. They have a combined 28% weight on Nifty 50 and account for 12% of the index's earnings.
The remaining 34 have an average PE of around 14.6 times.
Of the 16 stocks with the priciest valuations, six are from the consumer goods and financial services sectors each.
The Nifty 50 closed on Friday at 17,094, trading at 17.7 times the estimated earnings for FY24 and an earnings per share of 973, based on consensus profits forecasts from analysts tracked by Bloomberg.
According to BQ Prime analysis:
An downward revision of 10% on the expected future earnings of the 16 stocks, coupled with PE de-rating, could bring the Nifty 50 Index alone by 1,000 points.
If the consolidated Nifty 50 earnings fall by 10%, the index will correct by 1,585 points, taking it to 15,508 levels.
Since an earnings slowdown will not hurt uniformly, stocks with higher PE multiple are at a higher risk of a faster de-rating in case they miss forecasts. Eicher Motors Ltd. is one such example. Following an earnings slowdown, its forward PE multiple has fallen from 52 times for FY21 to 28 times for FY24.
What that means is that pricey stocks will have a higher impact on the Nifty earnings and market cap if they fall short of expectations.