The recent correction in Indian equities has brought Nifty valuations down to more comfortable levels, even as the headline index masks deeper losses across the broader market, according to 3P Investment Managers.
While the Nifty has declined around 15 per cent from its 52‑week high, the fall in small‑ and mid‑cap stocks has been far more severe. The brokerage noted that “three out of 10 SMIDs have declined more than 50 per cent and two out of three have declined by more than 30 per cent from their two‑year highs,” highlighting a sharp underperformance versus large caps.
The report said the earlier outperformance of small and mid caps was “not driven by higher profit growth but by momentum post‑Covid and new‑to‑market investors,” making it unsustainable. While some value is beginning to emerge in select stocks, it cautioned that “not yet for the category,” adding that large caps continue to look more attractive.
Large‑cap companies, particularly Nifty constituents, are seen as relatively resilient in the current environment due to their limited direct exposure to higher crude and gas prices.
Banks, which form the largest weight in the Nifty, could even benefit, as they “may actually gain due to a steepening of the yield curve, rising yields in bond markets and higher working capital needs of few sectors,” assuming the disruption is temporary and does not lead to medium‑term asset‑quality stress.
On the downside, “OMCs, airlines and cement are the key adversely impacted sectors,” though their combined weight in the Nifty is relatively small at around 9 per cent.
Sectors with weaker pricing power and disrupted raw material availability, including fertilizers, packaging and chemicals, are expected to feel greater short‑term pressure.
From a valuation perspective, the report said the sharp fall in Nifty and an 18‑month time correction have reduced valuations by 21 per cent from peak levels. With the index now trading at around “17 times one‑year forward earnings,” valuations are described as “reasonable and have room for some rerating.”
The report forecasts a sustainable medium‑ to long‑term earnings CAGR of 12 per cent, supported by a lower cost of capital due to softer inflation and reduced market volatility.
