With the passing of the fiscal third quarter results season, the corporate earnings growth has put the benchmark NSE Nifty 50 in a more acceptable place for investors looking to accumulate. While investors must watch out for some earnings downgrade for the next year FY24, historical valuation shows that 17,000-17,400 range on Nifty would be good to add exposure, Sahil Kapoor, Market Strategist and Products Head, DSP Mutual Fund, said in an interview with FinancialExpress.com. Read on to see how Q3 results have influenced share market valuations.

Q. What should investors do amid the ongoing consolidation in the share market?

The great debate about how long the consolidation in Indian equity markets will continue is on. While a lot of participants believe that you should always do what ‘crowds’ don’t, it is rather difficult to know what ‘crowds’ are actually doing. Because there is a difference in saying and doing. We may gather views from a few participants but there is no definitive guide than the market data itself.

Q. What do Q3FY23 results show with regard to trailing and future earnings, and Nifty P/E multiples?

Q3FY23 is over. Nifty TTM (Trailing Twelve Month) EPS now stands at Rs 848 per data from NSE. It has seen a sequential growth of 2% quarter-on-quarter, and a 9% growth year-on-year in Q3 FY23. The Nifty P/E multiple now stands at ~21 times the TTM (trailing twelve months) earnings. Nifty forward P/E multiple, basis the market consensus of 18% growth in EPS in FY24, is now at sub 18 times the forward earnings.

During Q3, FY23 EPS was downgraded by 1-2%. Full FY23 to-date EPS downgrade is at 4%. These numbers tell us that earnings downgrades or the expectation that earnings will grow at a certain rate hasn’t fallen drastically. Although the market consensus for FY24 earnings remains high, analysts across the street are yet to cut estimates aggressively. Based on our reading of the data, it is expected that earnings may grow by ~12% in FY24 vs consensus of 18% growth.

Q. What does this mean for the share market, with regard to valuations?

The NSE Nifty 50 Index is now in its 17th month of consolidation. It made a then lifetime high of about 18600 in October 2021, and has since been in a broad range. It made a fresh lifetime high later in November, but hasn’t given a directional move since. From the October 2021 peak, Nifty is now down about 5%. But let’s look at what has happened to valuations and earnings during this phase.

Since the peak in October 2021 Nifty trailing twelve month (TTM) EPS (earning per share) is up 29.3% (from Rs 653 to Rs 848); its P/E is down 7.13 (from 28.17 to 21.04); P/B is down 45 bps (from 4.63 to 4.18); and dividend yield is up 30 bps (from 1.1% to 1.4%). During this phase interest rates – the 10-yr G-sec yield is up 100 bps. This means the index has gone through a consolidation with earnings rising, valuations normalising and prices becoming more attractive.

Q. So, is the valuation good enough for investors to buy aggressively, or not yet?

From a historical standpoint, if the index trades in the 17,000-17,400 range, it will get into the average valuation zone. This means equity investors should keep adding exposure to equities at this time. The sideways, non-directional move in markets is a good time to systematically raise equity exposure in a disciplined manner. History tells us that long periods of consolidation are part of secular bull markets in equities. It does appear that we are in the consolidation phase of a long term bull market for Indian equities.