Nifty PE Ratio: Valuation and earnings- Is Nifty expensive ?

Analysis of Nifty PE Ratio and why investor should be cautious before investing at current valuation

  • 22th May, 2019

Nifty PE ratio is the measure of how expensive the Nifty50 index is at given point of time. Nifty PE ratio is calculated by dividing the sum of market capitalization by the sum of earnings of all the Nifty50 companies.

Nifty is currently traded above 29 PE which is all time high valuation of Nifty. Now, Nifty is traded around all time high but to sustain at higher levels, Nifty earning must show a pickup in growth. After looking at the earnings of Q4FY1819 of companies, Nifty PE ratio above 29 gives us no comfort at all.

We are at the edge of global slow-down, trade-war and recession. People say that when macro and micro is worse, start to a build portfolio but at the current valuation of the market, we don’t think so. After one and a half year of consolidation (with big up-down movements), Nifty is at the level of Aug 2018 and still traded at 29.2 PE. For midcaps and smallcaps, after a major correction of one and a half year, still Nifty Midcap 100 index is traded around 30 PE and Nifty smallcap 100 index is traded at 27 PE. These are not the comfortable valuations and the investor should invest with caution. History says that whenever Nifty was traded above 25, a significant fall had happened.

Nifty Major correction after Nifty PE moves beyond 25

  1. In Feb 2000, Nifty was traded at 28 PE and it was followed by 50% correction.
  2. In Jan 2008, Nifty was traded at 27.8 PE and it was followed by 50% correction.
  3. In Oct 2010, Nifty was traded at 25.7 PE and it was followed by 26% correction.
  4. In Aug 2018. Nifty was traded at 28 PE and it was followed by 15% correction.

This is all about the current situation. Now let’s talk about the possibilities of near term future. The divergence between price and earning needs to cool down. For that either price may come down or earning may go up(which we want..!). One thing that our analysis ruled out is one-way up move in Nifty, because Nifty is already overvalued and till now there is no sign of pick up in earnings, So it is very tough for the market to sustain at higher levels. Now, our view is that, in upcoming quarters, earnings may pick up and price may fall or consolidate (maybe with big up-downs) at the current level, so that Nifty PE ratio cools down.

Concluding all these things, our view is that either we may see big ups and downs in the near term(good for a trader) until the earnings growth support the market valuation or the market will go in deep correction.

We hope, the article will help you to find the answers of your questions. Stay invested with caution and stay earned.
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