Market selloff sparks valuation reset, stocks under 20x P/E surge 60%

Stocks with P/E of less than 20x swell from 214 from 355

The ongoing market selloff has triggered a significant valuation correction, with the number of stocks trading at a price-to-earnings (P/E) multiple of less than 20x surging over 60 per cent.

 

As per an analysis by DSP Mutual Fund, there are now 355 stocks in the BSE AllCap universe with trailing P/E multiple of less than 20x, up from just 214 in September when the markets were at their peak. The BSE AIICap index comprises nearly 1,200 stocks across large-, mid- and small-caps.

 

“Across market capitalisations, price earnings multiples are trending lower. This shift is driven by a combination of slowing earnings growth and changing temperament of the market,” said the fund house in a note. “As the market swings into a manic-depressive phase, opportunities will emerge.”

 

Meanwhile, the number of stocks with a P/E of less than 10x have gone up by 75 per cent to 112 from 64 in September. Meanwhile, the universe of stocks with P/E of less than 30x has increased to 202 from 183 in September.

 

Some notable companies trading below a PE of 20 include Hero Motocorp, Amar Raja Engineering & Mobility, Welspun Corp, Hindustan Zinc, and Kaveri Seed.

 

The benchmark Nifty has declined over 15 per cent from its peak.

 

Goldman Sachs in a note said that following the correction over the past five months, valuations have moderated in line with our macro-modelled ‘fair’ value estimate. “Valuations have corrected significantly across MSCI India sectors (with the exception of financials, where valuations were already low heading into the correction),” the US-based brokerage said in a note.

 

Indian equities have witnessed a sustained sell-off in the last five months due to concerns over elevated valuations, weakening corporate profits, and unabated foreign portfolio investor (FPI) outflows. The sell-off began with FPIs reallocating capital to the more attractively valued Chinese equity market, spurred by Beijing's stimulus measures. Donald Trump's victory in the US presidential election last year raised concerns over shifts in US trade policy, leading to higher US bond yields and a stronger dollar, which prompted FPIs to reduce their exposure to emerging markets like India. Following Trump's inauguration, the imposition of trade tariffs further rattled investors, accelerating the exodus from risk assets. 

 

Though President Trump has softened his tariff threats by deferring some and granting exemptions to products covered under free trade agreements, his salvos on trade policy have become a source of dread for equity investors.

 

The decline in the corporate profits for the quarter ended in September and December further dented investor sentiment and exacerbated selling.

 

Since September, the P/E of Nifty declined from 25x to 21x, that of Nifty Midcap 100 fell from 45x to 33x, and the Nifty Midcap 100 fell from 28x to 23x.

 

"The fall in valuation multiples has to do with the overall selloff in the market and moderation in earnings, particularly in the December quarter. Many firms have reported moderation in the bottomline growth and contributed to a contraction in valuation multiples. Many stocks traded at valuations that were not justified by their earnings. In every bull run, certain stocks benefit from euphoria-driven valuations. But when correction sets in, even quality stocks are not immune to selling pressure,” said Chokkalingam. G, founder of Equinomics.

 

Chokkalingam added that there are stocks still trading at elevated valuations as they are showing a dip in profits, but there are some pockets of quality who became victims of the broader selloff and are trading at attractive valuations.

 

Market experts said that investment should assess the quality of management, debt levels, and earning growth before making a buying decision instead of blindly going by the valuation metrics.

 

"We are expecting the markets to be range bound or sideways. Even if there is some improvement in earnings, investors will not be in a rush to lap up stocks. They will wait for one more quarter to see if the situation has improved," said Amabreesh Baliga, independent equity analyst.