Nifty 50's Top Constituents Stand Tall Amidst Uncertainty

yesterday

◉ Abstract
The recent decline in the Nifty 50 index can be attributed to several interconnected factors affecting market sentiment. Geopolitical tensions, particularly the conflict in the Middle East, have increased uncertainty and volatility among investors. Additionally, significant foreign institutional investor (FII) outflows, surpassing ₹1,00,000 crore in October 2024, reflect concerns over high valuations in Indian markets compared to more attractive options abroad. Weak earnings reports from Indian companies have further fueled investor anxiety, prompting reassessments of growth sustainability.

Overall market sentiment has turned cautious due to uncertainties surrounding upcoming events like the US elections and ongoing geopolitical issues, leading to a broader sell-off. Technical analysis indicates potential support levels between 22,750 and 23,000, while valuation metrics suggest that despite recent declines, many key Nifty stocks remain fairly valued, with caution advised for new investments during this volatile period.

Read full analysis . . .

◉ Introduction
The recent fall in the Nifty 50 index can be attributed to several key factors that have affected market sentiment and investor behaviour.
● Geopolitical Tensions:
The ongoing conflict in the Middle East, particularly the Iran-Israel war, has heightened global uncertainty. This geopolitical instability has led to fears among investors, contributing to market volatility and declines in stock prices
● Foreign Institutional Investor (FII) Outflows:
There has been significant selling by foreign institutional investors, with outflows reaching above ₹1,00,000 crore in October 2024. This trend is partly driven by concerns over peak valuations in Indian markets compared to cheaper valuations in other markets, such as China
● Weak Earnings Reports:
Recent quarterly earnings from Indian companies have shown weakness, raising concerns about the sustainability of growth. This has led to increased selling pressure as investors reassess their positions in light of disappointing financial performance

● Market Sentiment and Investor Jitters:
Uncertainty surrounding upcoming events, such as the US elections and ongoing geopolitical tensions, has made investors cautious. This sentiment is reflected in the broader market sell-off and a lack of confidence in taking long positions during this volatile period

◉ Technical Analysis

● Weekly Chart
➖ The weekly chart indicates a strong upward trend, with the index consistently achieving higher highs and lows.
➖ However, a significant selling pressure from the peak has led to a sharp decline.
We expect to find potential support in the range of 22,750 to 23,000.

● Daily Chart
➖ The index has broken through the neckline of the Head & Shoulders pattern.
➖ While there is immediate support around the 23,900 to 24,000 level, we believe the index may struggle to maintain this level and could drop further.
➖ Robust support is anticipated between 22,750 and 23,000.

◉ Valuation Analysis
➖ The Nifty PE Ratio has dropped to 22.5, slightly below its 1-year average of 22.6 and significantly lower than its 5-year average of 25.24. This suggests that the Nifty is currently fairly valued.

➖ However, the recent quarter's lacklustre EPS growth is a concern, exerting downward pressure on the major index.


As the major index struggles, it's worth taking a closer look at the key Nifty constituents that carry substantial weightage.

1. HDFC Bank HDFCBANK
Sector - Banking & Financial Services
Weightage - 11.34%

● Technical Overview

➖ For nearly three years, the stock has been range-bound, exhibiting stability.
➖ Despite the broader market's downturn, it has shown no reaction, suggesting that its sideways movement is likely to continue.

● Valuation
➖ The stock currently trades at a PE ratio of 19.2, moderately above its 1-year median PE of 17.5.
➖ Notably, the company's earnings performance has shown improvement, with a quarter-over-quarter increase in EPS:
June quarter: ₹21.65
September quarter: ₹23.36

2. Reliance Industries RELIANCE
Sector - Oil & Gas
Weightage - 8.64%

● Technical Overview

➖ Following a record peak near 3,200, the price retreated and is now approaching its key support level of 2,550.

● Valuation
➖ The current PE ratio of 26.5 indicates undervaluation relative to its 1-year median PE of 28.3.
➖ Earnings growth supports this positive valuation outlook:
Current EPS: ₹24.48
Previous quarter EPS: ₹22.37

3. ICICI Bank ICICIBANK
Sector - Banking & Financial Services
Weightage - 7.74%

● Technical Overview

➖ The stock has maintained a strong uptrend, demonstrating remarkable resilience amidst recent market downturns.
➖ However, from a technical standpoint, a short-term pullback towards the 1,100 level cannot be ruled out.

● Valuation
➖ The present PE ratio of 18.7 suggests a minor overvaluation when compared to its 1-year median PE of 17.9.
➖ EPS improved significantly from ₹16.62 in June to ₹18.38 in September, indicating a positive trend in the company's financial performance.

4. Infosys INFY
Sector - Information Technology
Weightage - 5.83%

● Technical Overview

➖ The stock has successfully broken out of its Rounding Bottom pattern and is now consolidating above the breakout level.

● Valuation
➖ The present PE ratio of 28.7 suggests a minor overvaluation when compared to its 1-year median PE of 26.4.
➖ Earnings growth, although subdued, remains stable:
June quarter: ₹15.34
September quarter: ₹15.67

5. ITC ITC
Sector - FMCG
Weightage - 4.16%

● Technical Overview

➖ The stock remains in a strong uptrend, consistently forming higher highs and lows.
➖ After reaching an all-time high of 528, the price has pulled back and is now testing its crucial support zone between 460-470.

● Valuation
➖ The present PE ratio of 29.4 suggests a minor overvaluation compared to its 1-year median PE of 27.
➖ Furthermore, the earnings per share (EPS) has declined from the previous quarter, falling from ₹4.08 in June to ₹3.99 in September.

6. Bharti Airtel BHARTIARTL
Sector - Telecom Services
Weightage - 3.95%

● Technical Overview

➖ The stock price has experienced a notable rise.
➖ After hitting an all-time high near the 1,780 level, it has corrected and is anticipated to find support along its trendline.

● Valuation
➖ The stock's current PE ratio of 83.5 significantly exceeds its 1-year median PE of 65.3, indicating substantial overvaluation.
➖ Ahead of the upcoming quarterly results, earnings execution is not expected to be robust, potentially leading to a sharp correction in the stock price.

◉ Conclusion
Analysis of six pivotal Nifty 50 stocks reveals that, excluding Bharti Airtel, they are fairly valued. With a combined weightage of over 40%, these stocks underpin index stability
Given this significant representation, we do not foresee a drastic decline in the index from either a technical or fundamental standpoint.
However, the ongoing war may impact global sentiment, influencing market mood. Therefore, we advise caution when considering new buy positions.