Logo

Facts – Dissecting Periods of 2004 to 2014 and 2014 to 2025

  • In the period from 2004 to 2014, the aggregate of Nifty 50 reflected PAT Cagr of ~21%, Average Return on Equity of ~21% while the Nifty 50 index traded at an average PER (historical) of ~17.4x, implying a PEG ratio of less than 1.
  • Nominal GDP Cagr during the said period (2004 – 14) was at ~ 14.6%, implying a earnings growth multiplier of 1.2x for corporate profitability.
  • In contrast, the period from FY14 to FY25 saw the aggregate of Nifty 50 PAT Cagr at ~10%, Average Return on Equity at ~14% while the Nifty 50 index traded at an average PER (historical) of ~23.30x, implying a PEG ratio of 2.30x.
  • This valuation premium PEG ratio at 2.30x is far higher than that prevailed during 2004 to 2014 while earnings growth Cagr slipping to 10% from ~21%.
  • Nominal GDP growth Cagr also dipped to ~9.80% (2014 – 25) from ~14.60% (2004 – 14).
  • During 2014 to 2025 leverage for Nifty 50 aggregate ( Ex – BFSI) went up from ~52% to ~65% (D/E ratio).
  • So, what kept market getting higher valuation re-rating despite slipping ROE’s ( 21% to 14%), PAT Cagr (21% to 10%), Nominal GDP Growth Cagr ( 14% to 10%), and rising D/E ( from 52% to 65%)…. ?
  • Answer to our mind lies in the consistent narrative of ‘high growth round the corner (high teens to early twenties) by market participants, opinion makers and corporates which obviously remained elusive (barring couple of years) while the narrative every year got shifted forward to two years post the current one.
  • The question is : ‘How Long this narrative would hold or will the high earnings growth actually materialize or are we already under going valuation re-setting since October 2024 ( Last 1 and a ½ year)’.
  • We think it’s the last one, where we are in for a time correction leading to comparable valuation multiple with respect to peers (Countries and Companies).
  • Likely 1 more year to go in for consolidation !
Graph 1
Particulars FY04 to FY14 FY14 to FY25
Average ROE 20.91%   14.06%
Nominal GDP cagr 14.6%   9.8%
Nifty 50 Level cagr 14.2%   12.1%
PAT cagr 20.9%   10.0%
Average PER 17.40   23.30
*Source: CSEC Research.

Internals and Recent Developments

  • Analyzing the weightage movement in earnings of Nifty 50 basket, throws interesting insights. It can be observed on RHS graph mainstream sectors participated in earnings contribution during 2004 to 2014. Notably, Consumer Cyclical, Industrials, Utilities and Technology all gained weight in earnings contribution while interestingly Financials weight contribution remained constant at ~20%.
  • However, in the period from 2014 to 2025 the major earnings contribution came from Financials over ~14% while minor contribution was from Consumer Cyclical and Non-Cyclical and communications. Alarmingly, Technology, Industrial, Utilities, Basic Materials, and Energy were weight losers in earnings contribution.
  • In the period from 2014 to 2025 earnings growth was not only being polarized ( Financials Majorly) but also the aggregate run-rate is far slower at ~10% Cagr.
  • Consistent outflows from Foreign Institutional Investors (FIIs) over past one year around ~1.66 lakh crores in CY25 and ~Rs. 52k crores (YTD) in CY26 so far 11th March’26 is more likely to do with their re-balancing on account of higher relative valuation of India when compared to peers while currency depreciation not helping the cause either.
  • In contrast, domestic flows have been robust far exceeding the selling by FII’s providing the much needed floor to market.
  • Consistent currency depreciation along with trade deficit rising from -3.95% of Nominal GDP in 2005 to -7.51% of Nominal GDP in 2025 does not augur well.
  • Recent war in middle east makes going difficult. It is inflationary for our economy due to supply disruption and is essentially worse for corporates and consumers, as the additional cost is shared by both; eating into corporate profits and consumer surplus.
  • Further, the earnings projections for FY’27 will be negatively impacted due to ongoing war in Middle east. The extent of earnings damage will be dependent on the duration of conflict. Going by evolving dynamics around 200 bps drop in earnings growth for FY27 projections is likely.
Graph 1
Graph 1
*Source: CSEC Research.

CY 26 : Risk’s & Outlook

  • Falling earnings growth…
  • Polarized earnings contribution…(read Financials doing heavy lifting)
  • Fading/pushed forward narrative of high teens to early twenties earnings growth…
  • Ever rising high single digit trade Deficit @ -7.5% of Nominal GDP (Unlike Taiwan, South Korea, Indonesia or China each a rising trade surplus country, far lower P/BV and PER multiples while earnings growth have been north of mid-twenties in CY’25).
  • INR depreciation…
  • War in Middle East effecting supply disruption led inflationary pressure…
  • Early onset of heat wave….
  • Narratives citing historical averages for valuation multiples is under scanner.
  • Aforesaid factors, warrant’s a more elongated time correction/consolidation for Indian equity markets.
  • Upside is likely to be capped for sustainable new highs, till earnings growth surpass valuation multiples. Till then one has to content with breather rallies.
  • However, we believe, Nifty @ 24,500 large part of downside risk is already in the price, however further 5-7% downside on headline index cannot be ruled out in light of evolving crisis in war torn Middle East.
  • Eventually earnings has to justify valuations. Stretching and testing ‘time elasticity’ for valuations to hold good may not be a prudent idea.
  • Though, the jury is wide open as to ‘Whether Narrative of high earnings growth will come, continue to hold premium market valuation in near term Or
  • It becomes a function of valuation multiples driven by realistic growth.
Source: CSEC Research

Opportunities and Avoids

  • The fact that earnings contribution driver were financials while the PAT run-rate for aggregates was far slower at ~10% Cagr, implies the growth opportunities are in broader market.
  • Which is substantiated by aggregate earnings growth of mid and small cap having delivered 17% and 19% PAT Cagr over last 10 years, far better than that of Nifty 50 at ~10% Cagr.
  • On a brighter note average ROE has improved in last two fiscal to ~ 17% from last 10 years average of ~14%.
  • Probable sectors which are likely to beat market earnings growth :
    • Financials (Public & Private Banks + NBFC’s)
    • Defense
    • Metals
    • Automobile and Auto-ancillaries
    • Pharmaceuticals.
  • As far as IT sector is concerned, we believe firm and stickier allocation will happen only when its weightage in earnings contribution begins to rise. And for that to happen IT companies will have to deliver higher earnings growth than that of Nifty 50.
  • Given, the present scenario driven by AI disruption led re-strategizing/skilling/developing/ collaborating it will be a Herculean task for IT companies to beat market earnings growth.
  • It’s a bottoms up market.
  • CY 26 is likely to be a year for stock picker’s rather than secular sectoral trends.
* Note: Graph data is for illustrative purposes.
Company Logo

Cholamandalam Securities Limited Member: BSE, NSE, MSE, NSDL, CDSL
Regd. Office: Chola Crest, C54 – 55 & Super B-4, Thiru-Vi-Ka Industrial Estate, Guindy, Chennai – 600032.
Website: www.cholasecurities.com | Email id – csecsupport@chola.murugappa.com | CIN U65993TN1994PLC028674

Cholamandalam Securities Limited (CSEC) is a SEBI registered stock broker and depository participant. CSEC does not provide investment advisory services. Investors are advised to consult an independent financial advisor before taking any investment decisions.

RESEARCH
Dharmesh Kant Head of Equity Research +91-44-40047360 dharmeshkt@chola.murugappa.com
Balaji H Compliance Officer 044-30007226 balajih@chola.murugappa.com
Prem Kumar R Customer Service 1800 425 4477 premkumarram@chola.murugappa.com

Disclosure:

This report is for private circulation and for the personal information of the authorized recipient only, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not provide individually tailor-made investment advice and has been prepared without regard to any specific investment objectives, financial situation, or any particular needs of any of the persons who receive it. The research analyst(s), Cholamandalam Securities Limited (CSL), AMFI registered mutual fund distributor, who is primarily responsible for this report certifies that: (1) all of the views expressed in this report accurately reflect his or her personal opinions about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of Cholamandalam Securities Limited makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. The views expressed are those of the analyst and the Company may or may not subscribe to all the views expressed therein Cholamandalam Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time without any prior approval. Cholamandalam Securities Limited, its affiliates, directors and employees may from time to time, effect or have effect an own account transaction in or deal as agent in or for the securities mentioned in this report. The recipient should take this into account before interpreting the report. All investors may not find the securities discussed in this report to be suitable. Cholamandalam Securities Limited recommends that investors independently evaluate particular investments and strategies. Investors should seek the advice of a financial advisor with regard to the appropriateness of investing in any securities / investment strategies recommended in this report. The appropriateness of a particular investment or strategy will depend on an investor’s individual preference. Past performance is not necessary a guide to future performance. Estimates of future prospects are based on assumptions that may not be realized. Re-publication or redistribution in any form, in whole or in part, is prohibited. No part of this material may be duplicated in any form and/or redistributed without Cholamandalam Securities Limited prior written consent. The news items appearing in this are collected from various media sources and we make no representations that it is complete or accurate.

This report is for private circulation and for the personal information of the authorized recipient only, and we are not soliciting any action based upon it. This report is not to be construed as an offer or solicitation to buy or sell any security.

The research analyst certifies that all views expressed in this report accurately reflect his/her personal views. Cholamandalam Securities Limited makes every effort to ensure reliable information but makes no representation that it is accurate or complete.