In our universe of stocks there are only 19 businesses from top 50 businesses by market cap in India. That number translates into 18% or only one out of five represents NIFTY 50 stock index. We have always seen that these 50 stocks by average had always traded at expensive valuations. Out of last six years so far, NIFTY 50 index had traded least expensive only in 2014 and 2015 was the most expensive year.

It has been long time now we have shared our opinion with you that there are very few quality stocks which are trading at discount (Almost close to a year). To be precise on numbers, from our universe of stocks only 5 companies are trading at discount to its 2017 valuations and only 21 companies to its 2018 valuations. This has resulted for us to hold big chunk of cash in our portfolio. We are holding that cash on the opinion that in long –run equity returns are less attractive when prices are higher.

We have not only seen the high quality businesses which are trading at expensive valuations but also the low grade businesses are climbing up at faster rate. To understand the current market scenario, we did some indicative analysis of Indian market.

  • We created two portfolio with equal weightage, one compromising of highest quality businesses from our universe and other by largest names from the index by capitalisation.
  • We calculated estimated intrinsic value of each portfolio using automated valuation tool going back for six years.

The results of analysis are as follows:

portfolio compare


Some observation we can make from here:

  • In 2012 until 2014 there were many high quality businesses that were trading at steep discount to their estimated intrinsic values but overall big names in the market were still trading at expensive valuations.
  • Almost two years and some months back, with the change in the government, the market had not stopped climbing up for both, heavy weights as well as high quality businesses. Market peaked its run in comparison to its estimate intrinsic value in 2015 – 2016 financial year and are witnessing that point coming down.
  • Investing in high quality stocks when they are at steep discount had given far better returns then what index had given in last six years.

There is a small element of glass half full over here, with first quarter earnings reporting going on, any disappointments on the earnings front from here on will drag the overall market down close to its valuation. We would like to caution investors to re-look at what valuations they are buying stocks in this market.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.