Prasad pointed out that the headline valuation numbers often fail to account for the underlying disparity among sectors and stocks.
“The Nifty itself, at roughly 21 times forward earnings, will not feel very expensive… but about 50% of the net profits of the index come from low price-to-earnings (PE) sectors–27% comes from banks, about 5% from metals, and 19% from oil and gas, which are trading at 13-15 P/E” he said, adding, “Beyond these, valuations across the board are frothy, even on an absolute basis.”
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Prasad believes certain sectors and stocks are trading at inflated levels despite lacking fundamental justification. BHEL, for example, has a current market capitalisation of ₹80,000 crore
that remains unjustifiable even under optimistic profit projections based on potential orders over the next 8-9 years.
Discussing foreign institutional investor (FII) flows, Prasad believes the trends suggest that active managers have been bearish for a while. He attributed this to structural challenges in emerging markets (EMs), which haven’t delivered significant returns over the last decade, while the US market remains strong with a robust dollar.
He believes outflows will continue until the market settles at a level where valuations become a lot more attractive for active secondary market investors.
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Despite heavy domestic mutual fund inflows, Prasad warned against complacency. “The markets are flooded with domestic liquidity, but there’s a disconnect between price and value for most stocks,” he said, adding, “Eventually, valuations will catch up, and we could see corrections in several midcap and small-cap stocks, many of which are still overvalued even after recent price declines.”
Watch the accompanying video for the full interview.
