Stock markets are humming well to the tune of liquidity. The Nifty is inching forward. But action may well have tipped over to the mid- and small-cap stocks. Over the past month, the front-line-index gained a mere 2%, but the Nifty Mid-cap 100 and Small-cap 100 gained 10% and 15% respectively. The big question is, are the markets overheating.
Bank Nifty Future Price Support Zone 21500 Above, Target 23500—25100 (Positional), Buy on Dips
For the moment, it seems so. Earnings are still showing stress. Nifty 50’s revenues declined 29% year-on-year. Sure, operating profits rode on sharp cost-cutting, but results from heavyweights Reliance Industries, TCS and ITC belied expectations. Barring healthcare, utilities, private banks, most sectors were severely hit including metals, telecom and auto.
Investors are expecting a return to normal, but earnings growth too full normalcy is a long time away, say analysts. For smaller companies, the recovery could take even longer. But some of these stocks are soaring as if normalcy is just around the corner. The recent run-up suggests the market may just be beginning to over-price the recovery.
“After the 50% rally from March 20 lows, we believe some of this recovery is priced in. At 20.5 times 1-year forward price-earnings, the Nifty is now trading at a premium and is not offering a lucrative risk-reward proposition. Further upside hereon, in our opinion, hinges on demand/earnings normalisation and the abatement of the pandemic,” said a Motilal Oswal Financial Services note.
Further, returns could be selective and limited to a few good counters. Some signs of selective buying are already visible. Stocks in themes that are aiding work-from-home, vaccine, self-reliance, technology have been trotting ahead.
Nevertheless, some stocks are quite overvalued compared to their peers and their growth rates. A case in the point is Berger Paints.
For companies like Hindalco, growth in the overseas market is lending a helping hand.
India’s largest private sector bank, HDFC Bank, faces some lawsuits overseas, though the outcome may be negative.
For some tyre makers such as Balkrishna Industries, the agri-sector and the replacement market are supporting earnings growth.
But some stocks like HDFC AMC have been hit by the slowing growth in the sector.
Shares of Tata Power jumped last week after the company unveiled a plan to improve return ratios.
The Nifty 50 has two entrants SBI Life Insurance and Divi’s Laboratories. The latter is a contract manufacturing pharmaceutical as well as a supplier of active pharma ingredients, which are doing well. But the stock is quite pricey.
Still, the resilience of the stock market given all the increase in covid-19 cases across India is remarkable. And while liquidity is quite good, it does not seem like the Reserve Bank of India may be able to lower rates any time soon. Inflation is again rearing its ugly head.
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