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Notwithstanding the fact that the bellwether Nifty hit a new high, many of its constituents such as ONGC, Tata Steel, Coal India, JSW Steel, ITC and Dr Reddy’s Labs are trading up to 72 per cent discount to their 10-year valuation averages.
The steepest discount for any Nifty company was that of ONGC, which has a 12-month trailing PE (price to earnings) multiple at 2.4 times, as of November 30. This is at 72-per cent discount to its historical average of 8.3 times, according to Motilal Oswal’s latest Bulls and Bears report.
The oil and gas sector traded at a PE ratio of 12.6 times against the historical average of 11.9 times. ONGC has an average target price of ₹174.57, suggesting a 21.44 per cent potential upside.
How the companies fared
Similarly, Tata Steel shares traded at a 63 per cent discount at seven times (November-end) against a 10-year average PE of 19 times. Coal India traded at 47 per cent discount to its historical average, while JSW Steel and Dr Reddy’s Labs traded at 35 per cent and 26 per cent discount, respectively. This was on a trailing PE basis.
The metal and mining sectors were badly hit by the stiff export duty levied by the government recently. Though the duty was rolled back partially, commodity prices remain weak on the back of concerns over Chinese economic growth and nationwide protest due to the strict implementation of its zero-Covid strategy.
On the other hand, Reliance Industries was trading at a significant premium to their historical averages of 70 per cent, while that of Infosys and Grasim Industries were at 38 per cent and 33 per cent. Among others Britannia and HCL Technologies were trading at premium of 28 per cent each.
Nifty bounce-back
Overall, Nifty index PE ratio at 19.9 times as of November-end compared to 10-year historical average of 19.7 times.
The equity markets have bounced back smartly in the last two months, wiping out the entire decline so far this year. The Nifty has gained 8 per cent in the first 11 months of this year.
After the current rally, the Nifty is now trading at a PE of 22.4 times of FY23E and offers limited upside in the near term. The rally from here on will be a function of stability in global and local macros, and earnings delivery, said Motilal Oswal in its report.
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