Investors hoping for a recovery in the stock market are in for a disappointment as benchmark indices Sensex and Nifty extended their February fall to 4 per cent now. Stock analysts said valuations are turning attractive, especially for many large cap names. They said the downside looks limited, but the volatility may persist in the near future due to weak global cues.
"This kind of price damage creates its own negativity but there are positive signs. The RBI’s move to reduce risk weights for NBFCs and micro-borrowers is a big positive. Also, the correction has de-frothed valuations, and the Nifty is attractively valued at below 22,500 (19.2x 1YF P/E)," said Emkay Global.
On Thursday, Sensex was trading 21.57 points, or 0.02 per cent, lower at 74,580.55. Nifty stood at 22,526.50, down 21.05 points, or 0.09 per cent. PL Capital said the market may stay volatile in the near term but stabilise towards the end of December quarter of 2025. The biggest concern of the market – the FPI flows may turn positive on the back of higher capex, tax cuts & consumer demand revival, it said.
PL Capital said the hurdle rate for FII investments in India has risen to 10.5 per cent, assuming 4 per cent rupee depreciation, capital gains tax, and 4.5 per cent 10-year US treasury rate.
Historically, FII outflows peak within 4-9 months. Although uncertainty with regard to global markets persist, PL Capital believes the growth outlook in India looks far better for FY26 than in FY25.
"As the impact of the Budget starts getting reflected in higher Capex on a low base and tax cuts and monsoons revive consumer demand, we should see FPI flows turning positive. However, FDI outflows remain a lingering problem that can pressurize rupee and add to volatility," it said.
InCred Equities said a sustained correction from the mid-September 2024 peak eased Nifty’s valuation to below the 10-year mean level of 20 times one-year forward EPS.
"Real earnings yield improved to the positive territory for the first time since the Covid-19 pandemic, thus limiting the downside. However, the acceleration of consensus EPS cuts of late raises credibility of early-teen growth projections for FY26F-27F. Value-based themes to prevail, where we prefer high dividend yield stocks," it said.
Emkay Global said financials is the best trade on the RBI easing, but it sees any rise as an opportunity to lighten positions as valuations are still out of sync with medium-term growth. Its preferred sectors are Consumer Discretionary, Healthcare, and Telecom.