Emkay Global sees a 5% to 10% correction in the benchmark Nifty 50 index due to stretched valuations and lack of fresh triggers to justify such sky-high multiples. The research firm put HDFC Bank, SBI Cards and Eicher Motors on its “avoid” list.

What Happened: The brokerage firm expects a correction in the market index due to high valuations, a lack of positive catalysts and a tepid earnings season. The market has become frothy after the post-election rally and Nifty’s one-year price-to-earnings ratio is currently trading at 21.4 times, which is 10% above the five-year average, the brokerage said. 

According to the research firm, earnings growth will slow down in Q1. The bottom lines of BSE 500 companies, excluding financials in FY24, was powered by a 2.75% increase in EBITDA margin and with a strong base, earnings per share (EPS) of Nifty 50 companies is expected to slow down to 16.5% in FY25 compared to 18.2% in FY24, Emkay predicted.

This earnings deceleration, coupled with expensive valuations, could trigger a correction, and the manufacturing sector is exposed to this risk, it added. 

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It also expects the tighter monetary conditions to persist till the end of calendar year 2024 as the brokerage’s base case is that the U.S. Federal Reserve will cut rates only by the year-end and the Reserve Bank of India is likely to follow suit.

The recent rally in banks could fizzle out as rate cuts could be further delayed and interest rates could stay elevated for longer, the research firm said. Moreover, higher credit costs could hurt the profit of financial companies, the brokerage added.

The Avoid List: The brokerage gave HDFC Bank and SBI Cards an “under-weight” call among financials. It also sees derating in the stocks even as the market adjusts to a new growth and return-on-equity reality. Eicher Motors is also on the list as the firm prefers Hero Motocorp and TVS due to the product positioning and valuations.  

L&T Technology Services, trading at 40 times price-to-earnings multiple, is at large premium compared to large cap IT companies and also finds itself on the “avoid” list. The stock also has an estimates 5% EPS growth in FY25, not justifying the valuation. The last stock in the list is PI Industries, which it estimates will clock a 5% EPS growth in FY25 and FY26, trading at 33 times price-to-earnings. 

HDFC Bank’s share were rising on Monday after the lender reported better than expected Q1 numbers, prompting analysts to maintain their positive stance on India’s largest private lender.

Model Portfolio: Emkay said consumer staples, energy and technology sectors are the best places to invest to avoid the correction and put stocks such as Hindustan Unilever, Bharti Airtel, Hero Motocorp, Reliance Industries and Infosys in its model portfolio.

Reliance Industries’ shares fell on Monday after the Q1 earnings missed expectations. However, the brokerages remained bullish on the stock.

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