'Quality' stocks come at a premium, valuations have crossed pre-Covid level

The P/E for Bharti Airtel and Avenue Supermarts is currently below the pre-Covid levels. Reliance Industries, Cipla, Havells India, and Eicher Motors have seen the maximum P/E expansion

The valuation for most ‘quality’ stocks has surpassed their pre-Covid levels following a sharp run-up in stock prices. According to Kotak Institutional Equities’ analysis, one-year forward (FY22) price-to-earnings (P/E) multiple for 30 of 32 top companies across sectors is currently higher than the pre-Covid levels.

The sectors under consideration include automobiles, consumer durables, consumer staples, IT services, pharmaceuticals, telecom, and retail — those which have shown superior resilience to the lockdown and slowdown in the economy.

The P/E (on FY22 basis) for Bharti Airtel and Avenue Supermarts is currently below the pre-Covid levels. Reliance Industries, Cipla, Havells India, and Eicher Motors have seen the maximum P/E expansion.

In most cases, P/E has expanded despite a downward revision to FY22 earnings estimate. Page Industries, Havells India, Titan, and United Breweries have seen the sharpest downward revision. Despite this, these four stocks currently trade at a P/E which is higher than the pre-Covid levels. Investors can find stocks below the pre-Covid levels only in the financial sector.