As you know that since the last two years Indian market has barely any returns and market is hovering around almost the same levels that it was during mid 2024's. So in this article we will discuss about the factors responsible for this phenomenon. If you see on the index basis there is not much correction but if you see in individual stock wise then you can see correction in all sectors stocks be it large cap, mid caps or small caps. Even there are 50%-60% correction in large cap stocks. People's portfolio is bleeding but surprisingly no one wants to talk about it.
Index Return:
If you see the three main Index Nifty, Bank Nifty and Sensex you will notice that they have corrected themselves to some extent but if you dive deeper and see the stocks listed in this Indexes and individual stocks you will see the pain, as they have corrected themselves to a greater magnitude.
The IT stocks were a posterchild for Indian service industry and there was a time when IT stocks held a very good weightage in Nifty. There was a time when IT companies were growing at a CAGR of 15%-20% or even more. They have employed millions of Indians, provided them with a brighter future and lifted millions from poverty, then what went wrong with them.
The revenues are declining contracts are shrinking, mass layoffs are happening frequently. The answer lies in the business model. They used to get contracts from the High income countries while paying "Indian" wages but with the advent of AI their business model got disrupted. Another thing is their spend of RnD is very less as compared to their western counterparts, while they remember to do stock buy backs and giving dividends.
This is one of the reason India never got to built its own AI model. While in our neighbourhood in China focuses on RnD, they launched DeepSeek training it at a fraction of cost of OpenAI models.
Index Management:
If you see the Index then you will notice that the Index is driven by the top heavyweight stocks while the other large Cap stocks and midcaps stock are lagging much behind and to make you understand further I will give example of individual Indexes below.
In Nifty HDFC, Reliance, ICICI, Airtel and L&T control 40% of the volatility and rest stocks control 55%-60% of the volatility. The top 5 heavy weight stock are responsible for the 70% of the movement and the remaining components contribute the rest.
In the Sensex there are 30 components listed and the same situation is repeated in Sensex and Top 5 stocks in Sensex have 45.5% weightage and responsible for the 70% of the movement and the remaining 25 stocks have very little contribution in Sensex.
Bank Nifty is almost trading just below life high and the heavy weight stocks of Bank Nifty covers the proportion of 53%. HDFC, ICICI, SBI, Axis control the 65% volatility of Bank Nifty and the remaining 10 stocks has weightage of 47%.
Large Cap Stocks Return:
If we discuss the Large Cap Stocks Return, whose breakdown have been given below.
If you take the top 5 heavy weight stocks in the three indexes who have a lot of weightage in the three indexes then you will see, that in the Sensex Banking has 26% weightage and Reliance has 11.3% weightage and in Nifty Financial services sector has 37% weightage and Reliance has 8.2% weightage.
You will be shocked with the breakdown which will be presented below
In the last 1 year overall growth of HDFC +3%, AXIS +4%, ICIC +4%, SBI +5.5%, Kotak +6.1%, Reliance +6.1%. We are excluding Titan because of hike in Gold duties due to which the stock corrected and also excluding Indigo as due to DGCA policies this stock also corrected itself, many stocks that were a integral part of Nifty Bull run are now not a part of Nifty. One more interesting thing Q4 FY25-26 profit growth of Nifty 50 is 2.8%.
The average large cap growth is in the single digits and along with it if you combine Nifty 50 average growth for Q4 FY25-26 is around 3% which is very less. It has been seen historically that, in all the Bull Run the large Caps participate to a larger extent and they are the first one to do so.El-Nino Impact
Monsoon Impact:
El Niño’s stronger activity in 2026 is expected to disrupt India’s southwest monsoon (IMD forecasts 8%-10% less rainfall then Long-Period Average), which will put downward pressure on rural demand and agriculture-driven sectors while pushing food inflation higher.
Food inflation is the main concern: El Niño typically reduces rice, pulses, and oilseed yields, pushing food prices higher.
RBI’s FY27 CPI projection: 4.6%, above its 4% comfort level, with El Niño flagged as a specific upside risk alongside crude oil prices.
SBI Report says El Niño combined with geopolitical tensions could significantly pressure inflation in 2026, especially through agriculture and food supply shocks.
Magnitude of impact estimates while no exact percentage rise is confirmed, historical El Niño episodes (2002, 2009) saw food inflation spike 3–6%+; this year’s 8% rainfall shortfall is modest compared to those severe episodes, and India has better reservoirs, irrigation, and buffer stocks.
We have reached July month and in many parts of India is facing acute shortage of rainfall, if you see historically. There are 12 states which are on high risk but the highest impact states are UP, Karnataka, Tamil Nadu, Madhya Pradesh, Chhattisgarh, Jharkhand and these states are large contributor of Kharif crops and they are highly vulnerable. Due to which inflation can shoot up.
It's expected food inflation to rise moderately (likely 1–3% above current levels), potentially pushing headline CPI toward 5–5.5% if rainfall is significantly below normal, which could delay RBI rate cuts and keep markets volatile in agri-sensitive sectors.
Let's Find whether our markets are overvalued or undervalued according to Warren Buffet Indicator:
But Firstly understand how it works, to understand the context please see how its derived and the implications of the values.
In 2026 the Buffet indicator is standing at 121% which is in the over valued zone and caution is required.
Also I have attached image of market cap to GDP ratio of the historical years from 2021 to 2025.
PE Ratio:
If we see the PE ratio of large caps and mid caps then they are in the expensive valuation. The expensive valuation is not a problem but the growth of earnings should justify the PE ratio, but the growth in the large caps is very much slow and in single digits.
For 2020
For 2021
The historical PE ratio is given above in 2020 its was around 27 and in 2021 it was 41 which was highly overvalued and currently its hovering near the 20 which is median zone.
Conclusion:
Market is in a slightly overvalued zone, while there is single digits growth in earnings but the danger of correction still looms over if the growth of earnings didn't increase. If there is a broad correction in market then this can spread to the mid and small caps.
Disclaimer:
This article doesn't promote any type of buying and selling activity, and please consult your financial advisor before making any investments.
Comments
Post a Comment