Stock market strategy: Nifty 50 could correct in short term amid stretched valuations, say analysts. Check top picks

Indian stock market indices Sensex and Nifty 50 have corrected nearly 2% from their record high levels amid profit booking and concerns over high valuations. While the Union Budget 2024 had mixed overall impact, the stock market is likely to discount the budget and shift its focus to corporate earnings growth.

The Budget 2024 maintained the fiscal consolidation path and the focus on capex over revex continued, which analysts believe augurs well for India’s already healthy macro backdrop.

The domestic equity market reacted negatively to the hike in capital gains tax, but analysts are of the opinion that the small hike is not material. However, concerns over stretched valuations in the market prevail and that is expected to lead to short-term correction.

Seshadri Sen, Head Of Research and Strategist at Emkay Global Financial Services said he remains cautious on the markets.

“A good budget is in the price and unlikely to move the needle significantly. On the other hand, we are looking at a tepid earnings season, as topline growth remains moderate and margin tailwinds are petering out. Also, rate cuts are at least 1-2 quarters away. On the other hand, valuations are stretched at 21.4 (1YF P/E of Nifty), with no imminent upgrades,” Sen said.

Emkay Global maintained its overall stance that the market is vulnerable at these valuations and could correct in the short term. The brokerage firm prefers IT, FMCG and Durables over Industrials and Financials.

Analysts at Motilal Oswal Financial Services anticipate the market to quickly discount the budget and shift its focus to the trajectory of corporate earnings growth, which has remained marginally below its expectations so far in Q1FY25.

“With markets at a new high, the budget further bolsters India’s strong macro-micro positioning amid a fragile world economy. The combination of ~7% GDP growth and ~15% Nifty earnings CAGR in FY24-26, stable currency, moderating inflation, and buoyant retail participation may keep sentiments strong. However, valuations appear fair for Nifty-50 and expensive for mid/small caps. The Midcap index is now trading at a P/E of 33x, at a 60% premium to the Nifty,” Motilal Oswal said.

It continues to expect 15%+ earnings growth for Nifty over FY24-26 and believes valuations for Nifty remain in line with its LPA at 20.4x one-year forward earnings.

Preferred Sectors

Key preferred investment themes by Motilal Oswal include Industrials and Capex, Consumer Discretionary, Real Estate, and PSU Banks.

The brokerage firm remains Overweight on PSU Banks, Consumption, Industrials, and Real Estate. It recently raised IT to marginal Overweight from Underweight and cut Auto from Overweight to Underweight.

It also turned Overweight on Healthcare from Neutral, while maintaining Underweight on Private Banks and Energy in its model portfolio.

Brokerage firm Anand Rathi believes this budget will benefit industries such as agro-chemicals, automobiles, capital goods, cement, infrastructure, FMCG, metals, retail and renewable energy.

“The IT sector might grapple with implications of changes to the share-buyback policy, whereas the financial sector largely remains neutral. Further, we believe the change in the indexation norm for real estate may not impact end-user demand,” Anand Rathi said.

Top Stock Picks

Among largecap stocks, MOFSL top picks include ICICI Bank, SBI, L&T, M&M, HCL Technologies, Coal India, Titan Company, Mankind Pharma, Hindustan Unilever and Hindalco.

The midcaps and smallcaps stock picks include Indian Hotels, Ashok Leyland, Godrej Properties, KEI Industries, PNB Housing Finance, Cello World, Kalyan Jewelers, Persistent Systems, Angel One, and Metro Brands.

From these budgetary measures, Anand Rathi’s key picks are Astral, Crompton Greaves Consumer, Dabur India, Finolex Cables, Hero MotoCorp, HG Infra Engineering, Hindustan Unilever, ICICI Bank, M&M, NCC, Neogen Chemicals, PNC Infratech, SBI, Sagar Cements, Senco Gold, Siemens, Shilchar Technologies, Spandana Sphoorty, Sumitomo Chemicals, Suzlon and Ultratech Cement.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.