Why Are Indian Stocks Losing Their Buy Status?
Dalal Street, India's Wall Street, Mumbai
As of this week, the number of stocks on the NSE Nifty 200 index with a consensus ‘buy’ rating has plummeted to just 61, the lowest figure in at least a decade, according to data analyzed by Bloomberg. Prominent companies like LIC Housing Finance Ltd., Sun TV Network Ltd., and Dr. Lal PathLabs Ltd. have faced multiple downgrades this quarter, resulting in an average analyst rating of ‘hold’ for these stocks.
Analysts are increasingly skeptical about the prospects for further gains in Indian equities, which have enjoyed a remarkable nine-year rally. "Many stocks have now become obscenely expensive," noted Sahil Kapoor, a strategist at DSP Mutual Fund. With corporate earnings showing signs of slowing, analysts are rolling forward their earnings estimates amid weak sales growth and peak margins.
Currently, the Nifty 200 index is valued at approximately 24 times its 12-month forward earnings estimates, a sharp rise from the past decade's average of about 19 times. Kotak Institutional Equities predicts earnings growth for the benchmark Nifty 50 firms will decelerate to 8.4% for the fiscal year ending in March 2025, down from 20% last year.
Despite hitting record highs this year, concerns about expensive valuations are causing a shift in investor sentiment. While domestic and foreign investors have injected over $10 billion into local equities this quarter, the recent volatility and lackluster first-quarter earnings have prompted analysts to revise their ratings. Today, more than two-thirds of Nifty 200 stocks carry a ‘hold’ recommendation, reflecting a more cautious stance compared to nearly equal buy-and-hold ratings a decade ago.
Rajiv Batra, Head of Asia Pacific (ex-Japan/China) Equity Strategy at J.P. Morgan, expressed a more cautious outlook, stating, “An extreme heatwave followed by flooding has impacted demand, while earnings and growth in the last quarter have not met expectations.” He emphasized that the market has shifted to a range-bound trend, differing from the bullish momentum of previous years. “This is different from the situation we’ve had for the last three years.”
Wall Street titans remain confident that India remains a long-term play, with the highest forecasted GDP growth of any emerging market (as per the IMF), demographics tilted towards a young and healthy workforce, and an increasingly wealthy consumer market attracting the likes of Apple increasingly looking to sell its luxury-priced smartphones.
