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Mint
29-05-2025
- Business
- Mint
Returns trump valuations: Are these stocks screaming a buy?
In a market wary of stretched valuations, a cohort of Indian stocks have delivered over 30% returns despite falling P/E ratios — a rare show of strength grounded in earnings alone. A Mint analysis of 3,700 BSE-listed companies finds that 212 stocks have delivered over 30% returns in the past year even as their price-to-earnings (P/E) ratios declined. This rare divergence suggests a shift in investor focus — from re-rating-driven gains to core earnings performance. The list spans four large-cap and nine mid-cap stocks, but is dominated by small caps. Their outperformance is largely anchored in fundamentals, with 72% reporting healthy core earnings and strong growth in earnings per share (EPS), excluding exceptional items. The P/E ratio, one of the most closely tracked metrics in equity markets, measures how much investors are willing to pay for each rupee of earnings. A rising P/E typically reflects optimism about a company's growth prospects and can amplify share-price gains. Conversely, a declining P/E — or de-rating — is often seen as a sign of caution, driven by macro concerns or uncertainty around earnings visibility. Read this | What's behind steep stock market valuations? Kotak's Sanjeev Prasad has a surprise answer While the ideal scenario sees rising earnings fuel both share price and P/E growth, these 212 stocks offer a different narrative. Their earnings have surged, even as valuations have compressed. 'The fall in P/E ratios signals caution. But this divergence reflects a nuanced market dynamic where returns are primarily driven by robust core performance rather than investor-driven re-rating," says Bhavik Joshi, research analyst at Invasset PMS. 'This trend reflects a shift in market behaviour." Also read Aegis Vopak tanks up for growth with ₹2,800 crore IPO—but is the price too high? De-rating typically signals scepticism, Joshi explained. It can be due to global headwinds, sector-specific concerns, or muted earnings expectations. But when paired with sharp EPS growth, it can also indicate market mispricing rather than fundamental weakness. So what's holding back re-ratings? "Short-term global uncertainties and a wait-and-watch approach toward earnings consistency have contributed to the market's reluctance to re-rate companies," said Ranju Rajan, head of managed accounts at Axis Securities. 'However, the Indian economic structure continues to strengthen on several fronts." For these select stocks, fundamentals clearly took charge. Take telecom giant Bharti Airtel, the standout large-cap performer in this group. Its P/E dropped sharply from 139x to 56x, yet the stock gained 35% over the year. The real driver? A tripling in EPS (excluding one-offs or exceptional gains), from ₹11 in FY24 to ₹35 in FY25. The company's EPS is projected to rise further to ₹69.23 by FY27, even as the P/E is expected to fall to 26.86x, as per Bloomberg estimates. Among mid-caps, GE Vernova T&D India has posted a return of 69%, with P/E falling from 186x to 94x. A sharp improvement in execution helped push EPS to ₹24 in FY25, up from ₹7 the previous year. EPS is projected to reach ₹42 by FY27, with valuations expected to continue easing. Hitachi Energy India saw its stock rally 76% while its P/E declined from 270x to 213x, supported by EPS nearly doubling to ₹90. Further, Laurus Labs climbed 37% with EPS growing to ₹7, while its P/E fell to 87x from 108x. Both firms are expected to continue delivering double-digit EPS growth over the next two years. Fortis Healthcare, which saw its EPS rise to ₹2 in FY25 from ₹1 in FY24, delivered a 53% stock return. Bloomberg estimates point to robust earnings growth ahead, with EPS projected at ₹13.7 in FY26 and ₹17.8 in FY27 — potentially bringing down its projected P/E to 52x and 40x, respectively. 'Despite strong earnings and solid returns, companies like Bharti Airtel and GE Vernova have seen valuation multiples compress, reflecting a market shift toward core performance over re-rating," said Joshi. 'This trend highlights the need to focus on fundamentals and earnings as key drivers of value." Also read Powering auto giants: Can Belrise's IPO charge up your portfolio? For now, macro trends and earnings performance remain key to market direction. 'In the current environment, large caps and select mid/small caps with strong balance sheets are well-positioned to outperform. In the near term, macroeconomic indicators and earnings will continue to guide market direction. As cyclical and structural drivers align, re-rating opportunities will emerge, though this will be a gradual recovery which will be sailed through by investor patience to identify turnaround stories," said Rajan.
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Business Standard
07-05-2025
- Business
- Business Standard
How can retail investors make money in the current markets?
Foreign flows have started to trickle in amid geopolitical uncertainties and tariff war fears. ANIRUDH GARG, partner and fund manager at Invasset PMS, tells Sai Aravindh in an email interview that sustaining these inflows will depend on stabilising global conditions, easing valuations, and the relative attractiveness of Indian growth. Edited excerpts: Are more earnings downgrades likely after fourth quarter earnings, and which sectors are most vulnerable? More earnings downgrades are probable as fiscal 2024-25 (FY25) results come in. Nifty earnings forecasts for FY27 have already been cut by around 6 per cent since late last year, and global headwinds like tariffs and weak exports could trigger further cuts. Nearly 80 per cent of companies have seen FY26 profit estimate downgrades so far, with around 39 per cent facing cuts of more than 5 per cent. The most vulnerable sectors remain information technology (IT) services, consumer discretionary, metals, and parts of consumer staples due to margin pressures and demand risks. In contrast, domestically driven sectors such as banks, healthcare, defence, and capital goods continue to show relative resilience with stable earnings. Amid global trade uncertainties, how are fund houses currently positioning their portfolios? Fund managers are turning more defensive, reallocating towards domestic-facing sectors and high-quality defensives. Exposure to globally sensitive sectors like IT, energy, and commodities has been reduced, while weights in financials, healthcare, consumer staples, and defence have increased. Cash holdings have risen sharply as a precautionary move. Equity mutual fund cash balances hit a record ₹1.81 trillion recently, with several top funds holding over 15–20 per cent in cash. This reflects a more guarded stance, allowing fund houses to maintain flexibility and deploy capital once volatility from global trade uncertainties presents clear opportunities. Will the strong inflows from global fund sustain going ahead? Global inflows into Indian equities have shown a tentative recovery after heavy selling earlier in the year, with foreign investors turning net buyers in late April and reversing part of prior outflows. However, year-to-date figures still show net selling, underscoring lingering concerns over valuations and global risks. Sustaining these inflows will depend on stabilising global conditions, easing valuations, and the relative attractiveness of Indian growth. There is optimism that foreign portfolio investor flows will gradually improve through FY25, but the pickup is likely to be measured and cautious rather than aggressive, especially with trade and rate uncertainties still weighing on sentiment. Do valuations in small and mid-cap stocks appear compelling at this stage? Small-and mid-cap valuations have moderated after recent corrections but are not outright cheap. The mid-cap index is down about 12 per cent from its September peak, and small-caps are down around 18 per cent, yet valuations remain at a premium to large-caps. Selective opportunities exist, particularly in sectors with strong domestic demand and niche growth drivers. State-run defence companies, mid-tier banks, hospital chains, and speciality consumer plays continue to show robust growth potential. While broad SMID valuations are elevated, high-quality names within infrastructure, healthcare, defence, and niche financial services offer attractive long-term opportunities. How can retail investors best capitalise on the prevailing trade-related uncertainties? Retail investors can capitalise on trade-related uncertainties by focusing on domestic-oriented sectors like banking, telecom, consumer staples, and healthcare, which are less exposed to global risks. These segments tend to remain resilient during trade disruptions. Additionally, market corrections driven by geopolitical or trade scares often reverse over time, so disciplined investors can use these dips to accumulate fundamentally strong stocks at lower costs. Diversification remains critical: holding some gold or gold ETFs acts as a hedge, as gold typically performs well during global turmoil. Sticking to SIPs or periodic rebalancing allows investors to benefit from long-term compounding. Domestic retail investors continue to act as a stabilising force, cushioning the market against foreign outflows. Ideal portfolio allocation (equity, debt, gold, cash) in the current environment? A balanced allocation is key. Equities should make up around 60–65 per cent of the portfolio, focusing on high-quality, domestic-facing stocks. Debt or fixed-income should account for about 15–20 per cent, providing stability and income, particularly as interest rates have softened. Gold should hold a 10–15 per cent weight, serving as a hedge against global volatility and trade uncertainties. A cash or cash-equivalent allocation of around 5 per cent (up to 10 per cent for conservative investors) ensures liquidity and readiness to deploy capital during market dips. This blend strikes a balance between growth and defence, positioning the portfolio to weather short-term risks while capturing long-term upside.
