The liquidity-driven rally pushed not just benchmark indices to record high in April, but as much as 188 stocks on the BSE hit fresh record highs in the same period.
The S&P BSE Sensex had a touch and go moment with mount 30K, while the Nifty hit a record high of 9,273.90. But, the action was seen in the small and midcap space, which outperformed benchmark indices by a wide margin in the financial year 2017.
Improved macroeconomic environment, abundant liquidity both global and domestic, government’s focus on reforms, stable currency and commodity prices, and hopes of earnings recovery have all contributed in the sharp run-up seen in benchmark indices.
Stocks which hit fresh lifetime highs in April include names like HDFC , Maruti Suzuki , Kotak Mahindra Bank , Yes Bank , P&G , MRF , RBL Bank , Dalmia Bharat , Godrej Industries , Natco Pharma , IIFL Holdings , Future Retail , Jubilant Life Sciences , Exide etc.
The fiscal year 2017 was a cherishing year for investors backed by robust flows by foreign institutional investors as well as domestic institutional investors (DIIs).
FII poured net Rs 50,206 crore into Indian equity market in FY17 compared to a net outflow of Rs 17,579 crore in FY16. Domestic mutual funds pumped Rs 54,735 crore in the equity market, making them a significant contributor in the market besides FII.
The S&P BSE Sensex rose by about 18 percent in FY17, but analysts see limited upside for benchmark indices from current levels as we enter unchartered territory. But, there will be a lot of action in individual stocks.
“It is a great feeling to see the Sensex back at around 30,000. Indian market is a great stock-picker’s market, and it continues to remain so. Valuations in some cases are looking a little stretched but there are enough and more opportunities,” Sudip Bandopadhyay, Market Expert said.
“Investors can look at some of the logistics stocks amid hopes of implementation of goods and services tax (GST) which is around the corner. VRL Logistics, Allcargo Logistics, all are great buys at current levels,” he said.
Mid and smallcap stocks hogged the limelight in the last 12 months which is reflected in the sharp run-up seen in the prices. Some of the small & midcap stocks have more than doubled investors wealth in the same period.
Valuations look stretched
The S&P BSE midcap index rose over 33 percent, while the S&P BSE smallcap index rallied 37 percent compared to 17 per cent rally in the S&P BSE Sensex. The broader market recorded their second-best performance in seven years.
After declining 9 percent in FY16, the Nifty delivered 17 percent returns in FY17. Over last 24 months, the index has come back full circle, crossing 9K after first touching that level in March 2015.
At 22.5x trailing 12 months and 18.1x FY18E P/E, we believe valuations do not leave much room for upside unless accompanied by an earnings recovery, Motilal Oswal said in a report.
The Sensex trades at a 12-month forward P/E of 18.1x, slightly higher than its long-period average of 17.2x. Valuations for the Nifty, based on both one-year forward earnings and on trailing earnings are rich but at similar levels to March 2015.
“When the Nifty scaled 9k in March 2015, the 12- month forward P/E was 17.4x. Today, the 12-month forward P/E (based on March 2018E EPS) is 18.1x,” Gautam Duggad, Hd-Research, Instl Equities, Motilal Oswal Securities said.
The entry level valuations today of 18-18.5x with an underlying assumption of 20 per cent earnings growth and if earnings growth comes out at 10 per cent in that case forward PE could become 20x. Hence, returns from here on will not be that easy explains Duggad.