In a Market Pulse report, BNP Paribas stated that despite a recent correction, Indian stock market valuations are still at a premium to the high-yield period of 2010-14. It told that though valuations of India stocks/sectors are largely down from their 2021 highs and some are trading near their five-year mean NTM P/E, it believes that the valuations were high, to begin with, fuelled by the easy monetary policy globally.

BNP Paribas said that Nifty’s total returns over the last decade, and particularly since 2015 as bond yields began moderating, have been boosted by the PE expansion; similar is the case with sectors like IT and FMCG, while utilities saw a de-rating. Besides, though sectors such as FMCG and pharma are trading close to or below their five-year average NTM P/E, is still at a premium to their valuations in 2010-14. It added that the consensus FY22-25 earnings CAGR for FMCG, IT, and pharma are less than their earnings CAGR in FY11-15, despite the sectors trading at a valuation premium. According to its observation, banking is the only sector trading at a discount versus its historical valuations, with higher comfort on earnings growth. Earnings delivery will be key for sectors such as capital goods and consumer durables that are trading at a premium to their history on higher-than-historic earnings growth expectations.

Post the recent correction, the Nifty 50 is trading at just 7 percent above its long-term average. It added that the financial sector, particularly banks, provides us valuation comfort vs. their valuations during a high-yield/inflation period, as it assumes the worst in the asset quality cycle is over, provisions are sufficient, and capitalization for sector leaders is more than sufficient and anticipates strong earnings growth and healthy ROE.