ET Intelligence Group: Despite the recent uptick, a majority of the companies in a sample of BSE 500 continues to trade below three-year and five-year average valuations, shows an analysis by ETIG. In addition, the proportion of small-cap companies trading below their long-term average valuation is higher than their mid-cap and large-cap counterparts.

For a sample of 412 companies, excluding banking, financial services and insurance (BFSI), three out of every four companies have earned returns over the past month and nearly half of them trade above their year-ago levels. However, 56% and 53% of them are still available at lower price-earnings (P/E) multiples compared with the three-year and five-year average valuations.

Segregating the sample companies based on their latest market capitalisation shows more stress in the small-cap category that is companies with under ₹10,000 crore market-cap. Over 64%, or two out of every three, of companies in this category now trade at lower valuations. In addition, 80%, or four out of every five, of small caps failed to generate one-year returns. While their valuations look cheaper, investors need to observe caution since during tough economic conditions small-caps often show heightened volatility and higher value erosion since they tend to rise faster and often above their fair values during good times.

Large-caps with a market cap of ₹50,000 crore or higher and mid-caps with market cap between ₹10,000 crore and ₹50,000 crore in the sample show a similar trend. Over half of the companies in each category trade lower than their long-term valuations. Also, 41% of large-caps and 49% of mid-caps trade lower than their year-ago stock prices.

For a sub-sample of BFSI companies from the BSE 500 list, around one-third now trade below their price-book (P/B) multiples. In case of these companies, P/B multiple provides relevant information about relative valuation.

While valuations across the board may look attractive, investors need to take a sector view. For instance, over two-thirds of IT companies in the sample trade at lower valuations but the sector is grappling with short-term headwinds amid delayed project ramp-ups and slack in demand for transformational deals. On the other hand, sectors focussing largely on the domestic market such as cement, FMCG, fertilisers and utilities may not have direct exposure to the impact of global developments.