High P/E ratios a new normal for Indian capital market

Analysts say PE around 20-23 is definitely not very cheap, but not expensive nor peaked; Any correction likely to be a cherry picking option for long-term investors; History shows that corrections triggered by geopolitical events were opportunities to build positions

Hyderabad: With price-to-earnings (P/E) ratio reaching to 24, at 2008 level, fears about possible crash are gripping the domestic markets as Indian equities are considered to be expensive when compared with the global peers. However, market analysts rule out any crash, but a major correction before Lok Sabha poll results, as strong domestic fundamentals are supporting the economic growth. As India is the fastest growing economy in the world, we see more room for the domestic capital market to grow, forecast analysts.

BSE Sensex on Wednesday (April 3, 2024) recorded a daily P/E ratio of 25. All-time high of Sensex’s P/E ratio was 36.210 in February 2021 and record low of 15.670 in March 2020. And the NSE-50 group’s P/E ratio was 23.1.

“Currently, the Nifty’s P/E is at 23, showing that investors are feeling pretty positive about how those 50 stocks will do in the last quarter of 2024. But just because the Nifty’s high PE doesn’t mean you should rush to sell your stocks,” Basant Kumar Agarwal, chairman (AP &TG chapter), Association of National Exchanges Members of India (Anmi), told Bizz Buzz.

“Indian economy is doing better than other economies in the world. Stock market valuations will definitely be at a premium. P/E crossing 25 is expensive. Since our economy is doing well, PE around 20-23 is definitely not very cheap, but not peaked as well,” remarked V Vinod Kumar, a momentum investor.

Generally, a 20-25 P/E ratio is considered as an average level and anything below is a good PE ratio. Based on this, the majority of investors are under the impression that Nifty is showing exhaustion in the trend as the benchmark index is hovering at a 12-month forward P/E ratio of 19.4x, which is largely in line with its long-period average (LPA) of 20.3x.

Broader markets trade at expensive valuations. For instance, NSE Midcap-100 index is trading at 46 per cent premium to Nifty.

NSE Nifty moved up 2.7 per cent in 2024 so far. During the last 12 months, mid-caps and small- caps gained 60 per cent and 70 per cent, respectively, while large-caps rose 29 per cent only. During the last five years, mid-caps outperformed large-caps by 71 per cent, while small-caps outperformed large-caps by 37 per cent.

“When we cross 25, we need to be careful. After elections in 2014 and 2019, P/E ratio touched 28-30 range. Now, P/E ratio is around 23, there’s room for P/E ratio to touch 25 and then go further to 30 level also. The reason is we’re in election year,” forecasts Kumar.

The Nifty represents a collection of 50 different stocks. When we talk about the Nifty’s price changing, it’s because those 50 stocks are doing better or worse, observes Agarwal.

“Take, for example, during July 2023 though Q1 results were really good, but the market stayed steady as markets have performed in advance, and the PE automatically adjusted from 24 to 21 within two to three months. So, basically markets are assuming Q4 results to be great and may have performed in advance. As the results for the Q4/2024 come out, we might see a similar scenario where the Nifty’s price remains stable, even if some of the stocks do perform as well as expected,” remarked Agarwal.

“Inflation is very well placed. RBI may reduce rates amid lower inflation. More activity and more RBI measures will help the industry and economy. So considering the macro situation, the valuation P/E is decent enough. It’s not cheap and not too expensive,” further adds Agarwal.

Sebi chairperson Madhabi Puri Buch recently said “Indian capital markets are commanding higher valuations because of foreign investors’ optimism and trust in the country. At 22.2, the P/E ratio earning multiple in the Indian market is higher than the average of many indices around the world.”

“Yes, some people say that we are an expensive market, but still why is the investment coming? Because this is a reflection of the optimism and the trust and faith that the world has in India today that we are commanding the kind of multiples in our markets,” Buch said. Analysts see upward momentum for IT, banking, paper industry, and media sectors.

Kumar forecasts: “Mid-caps small-caps have so many themes, which will help capital markets move up further. Railways, semiconductors, infra, batteries, EV, govt making huge investments in these sectors, which will support the economy. It’s a good opportunity for investors to park their surplus money in stocks. People can accumulate stocks as the market reacts downside in the next 3-6 months.”