The ongoing correction in the domestic equity markets has taken a significant toll on the bourses, with 351 stocks in the BSE 500 index entering a ‘bear’ phase. A ‘bear’ phase is defined as a decline of 20% or more from their recent peaks. In recent weeks, factors such as China stimulus, rising US yields, sustained selling by foreign institutional investors and expensive Indian valuations seem to have weighed on the equities’ performance.
With a fall of nearly 63% from its 52-week high of Rs 474, Sun Pharma Advanced Research Company emerged as the top loser in the BSE 500 group. Sterling and Wilson Renewable Energy, Network 18 Media & Investments, Chennai Petroleum Corporation, Honasa Consumer, Adani Green Energy, Mangalore Refinery And Petrochemicals and Cochin Shipyard have also tanked over 50% from their respective 52-week highs till January 23, 2025.
According to BNP Paribas, FII holdings have reduced to 16% in 2024 after peaking at 20% during FY14-20. Considering the present market condition, the brokerage believes that the strong performance of mid-and small caps since January 2023 has increased their valuation premiums over Nifty 50.
“Both mid- and small-caps are currently trading at rich valuations compared with their respective long-term averages. We see better value in large caps and prefer these over mid-and small-caps in CY25,” BNP Paribas said in a report.
Sanofi India, Godfrey Phillips India, Titagarh Railsystems, MMTC, PNC Infratech, Easy Trip Planners, Garden Reach Shipbuilders & Engineers, Rajesh Exports, NMDC Steel, Adani Total Gas and BASF India are also down between 45%-50% from their 52-week high levels.
As far as valuations are concerned, BNP Paribas thinks that valuations in India are higher than the levels seen overseas, which can be partially justified by India’s strong GDP and earnings growth, along with its long term earnings growth potential. “Nifty 50 is still trading above the historical average. On the other hand, other
Asian markets are trading close to their lowest levels since 2010,” it said.
Looking ahead, the Union Budget 2025 is expected to capture significant attention, potentially providing a boost to the Indian equity market. Ravi Singh, Senior Vice-President (Retail Research) at Religare Broking, remarked, “The fiscal deficit target, anticipated to hover around 4.5% of GDP, could act as a ‘magical’ figure to uplift market sentiment. This target reflects a balance between fiscal consolidation and essential capital expenditure. However, its impact will largely depend on how well it aligns with broader economic objectives and whether it meets investor expectations for growth and stability.”
Singh added that investors looking at capital expenditure (capex) stocks ahead of the 2025 Budget may consider Larsen & Toubro (L&T), Siemens, and Bharat Electronics (BEL). These companies are well-positioned to benefit from anticipated government spending on infrastructure and defence.
“However, there are concerns that the Budget may disappoint, as analysts suggest that capex growth could be limited due to fiscal constraints, potentially leading to muted market reactions. The focus will likely remain on maintaining fiscal discipline while attempting to stimulate growth through targeted investments in key sectors,” Singh said.