Value Stocks Regain Selectivity Following Market Corrections Amid Ongoing Earnings Concerns

Market Valuations Easing as Indian Equities Correct

Recent data suggests that the correction in Indian equities is uncovering pockets of value, despite concerns around earnings growth keeping investors and fund managers from turning outright bullish. Fund managers and brokerages are reinforcing a shift toward bottom-up investing, with an increased focus on earnings resilience and balance sheet strength rather than broad market direction.

The correction across the board has seen more than 68% of the Nifty 500 trading below its peak valuation multiples. Elara Capital, in a recent report by Garima Kapoor, noted that the Nifty 50 is trading at about 17.3 times one-year forward earnings, around 7% below its 10-year average. Historically, this level has acted as a floor outside of extreme shocks.

Markets have typically rebounded from these valuation zones, even as near-term volatility persists. The current phase marks a shift from a liquidity-driven rally to a more earnings- and valuation-led market, increasing the importance of stock selection. This shift is also evident in the correction of large caps, which are now trading at a discount.

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Large Caps Attracting Attention

Large caps, which until recently traded at a premium, are beginning to look more attractive even in absolute terms. According to Chirag Setalvad of HDFC Asset Management Company, large caps are now at roughly a 17% discount to their 10-year average, compared with a 10–15% premium earlier.

The adjustment has been sharper in mid- and small-caps. Indices have corrected, with mid-caps down about 15% from their peak and small caps over 20%. However, the valuation reset has been deeper when factoring in both price and time.

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Valuations have corrected across sectors. For example, cement and consumption names such as ACC and Bata India now trade at about 10.9 times (from 22.6 times) and 25.8 times (from over 62 times) respectively. In financials, Bajaj Finance has moderated to 31.6 times from around 40 times, while Angel One has declined to 19.4 times from 30.4 times.

Fund Houses Adjusting Positions

Fund houses are adjusting their positions in response to the correction. "We are dropping our conservative stance on equities," Sahil Kapoor of DSP Mutual Fund recently told Moneycontrol. Kapoor noted that the correction in mid- and small-caps, along with time-led earnings growth, has significantly eased valuation excesses, even as stock-level declines have been sharper than indices.

For instance, while mid- and small-cap indices are down 15–20%, nearly 40% of stocks in these segments have corrected 30–40% or more, creating a more favourable entry point selectively.

Opportunities Emerging

The result is a market that is cheaper, but not unequivocally cheap. Bernstein in a recent note added that the Nifty 50 is still pricing in long-term free cash flow growth of about 10.5%, among the lower levels seen over the past decade, but not yet at trough levels.

While headline valuations have corrected, part of the reset has been offset by earnings downgrades, limiting the extent of the market’s apparent cheapness. A growing divergence beneath the index is becoming evident, with clearer opportunities at a sector level rather than across the board.