Nifty is not a value buy any more

Will the current rally take the market to a new high or is it just another relief rally that will bust at the first hint of a bad news flow? Analysts are divided, but the Nifty's valuation ratios hint the market is at a tipping point. At Thursday's close, Nifty was trading at a little less than 18 times the combined net profit of its constituents stocks, slightly lower than its 15-year median P/E multiple of 18.3x.

"If you look at the historical valuations, market is fairly valued right now and there is room for an upside if the news flows remain positive in the near-term," says Devang Mehta, senior vice-president and head (equity sales) at Anand Rathi Financial Services. The US Fed's decision to maintain monetary stimulus has provided headroom to the Reserve Bank of India (RBI) and this will support the market for next few months, he adds.

Others point to India Inc's poor earnings growth. "To sustain current valuations, Nifty 50 companies' earnings should grow by at least 15 per cent next year, which looks impossible given a tepid 3.5 per earning growth in FY13 and flat earnings during the first quarter of the current fiscal," says Dhananjay Sinha, co-head (institutional equity) at Emkay Global Financial Services.

In past three years, there has been a steady decline in the return on equity for Nifty companies and at the current level of 16.7 per cent, it is 200 basis points below its historical average. Historically, the market has moved in tandem with the rise and fall in this ratio but with a lag. The current rally is led by sectors that are the risk of facing a cut in their returns on equity - banking and financials, infrastructure and construction and capital goods, etc.

There is a fear that the sell-off could start as early as mid-October when the second-quarter earnings season kicks off. "The market seems to have over reacted to Fed announcement. Ultimately, what matters to the Indian market are the domestic factors which don't show any sign of improvement as of now. The second quarter earnings are likely to be worse in many years and fiscal numbers are also likely to surprise on the negative side. This will set the stage for a market correction," says G Chokkalingam, MD and CIO, Centrum Wealth Management.

Others describe it as a relief rally triggered by bank and financial stocks. "The rally is being led by banking stocks, which had witness a meltdown due to various measures by the central banks in its bid to fight rupee depreciation. The market is now likely to consolidate in a narrow band at the current level waiting for the next trigger," says Sandeep Gupta, vice-president and head - business associate equity advisory at Motilal Oswal Securities.