Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Is the Nifty Overvalued?

The Nifty trades near its all time high, at 4214 today. Is this too high? We have come up more than 60% from the June 14, 06 low of 2632. Everyone seems to be skeptical and is waiting on the sidelines, but is this market really overheated?

On May 10, 2006 the markets were at their last highs – on May 11, the markets crashed and fell nearly 30% from there. So what was the Nifty doing at that time? On May 10, the Nifty closed at 3754, at a P/E of 21.28, which translates to an EPS of Rs. 176. Today, the Nifty’s at 4214 with a P/E of 20.18 – that means an EPS of 209.

That means, since the last peak of the Nifty, the markets have moved up 12.25%. And earnings have moved up 18.37%! Is it really irrational? If this continues for three more quarters, the effective P/E at todays rate is 17.5 – which is quite reasonable for an annualised earnings growth of 24% in the top companies.

Interestingly, this is after moving out low P/E companies like Tata Tea and SCI and replacing them with High P/E companies like Suzlon and Reliance Communications. Usually, such a move would have resulted in a spike in the Nifty P/E, but earnings growth has left it steady – that means the real earnings growth has been even more stronger than the 18% noted.

I expect the budget to boost earnings, but pare down speculative growth. That will probably not affect the Nifty very much, and almost definitely will push earnings growth to stay at current levels. That leaves room for growth from here – the market is at a high, but it’s definitely not overvalued.

(Read the Nifty details)

  • Anonymous says:

    >Hi Deepak, quick question for you – it seems that in previous years, the market has tended to peak in Feb, then fall after the budget and stay cool for 2-3 months before rising again after June. You think that may be the case this year too?

  • Deepak Shenoy says:

    >In 2004 and 2005 the market fell in Jan and remained benign in Feb, to rise again later (2004 saw a big crash of course)

    In 2006, the market went only one way – up – from Jan to May 10. Even Feb was a positive month.

    This year seems to be another anomaly – remember that there is a HUGE amount of cash flowing into the markets from Indian retail investors. So it’s impossible to predict a fall – even a short term one – but my feeling is that markets will not fall much as long as there is cash waiting to come in.

  • Anonymous says:

    >Nifty and Sensex are just indicators. At the end of the day its the individual company performance that makes a difference to portfolio returns.Day-to-day Sensex and Nifty closing is really irrelevant.It may help to know where the market is headed on a particular day but the numerical value is not so important because as you have mentioned earnings growth is quite good and it justifies the high valuations.

  • Anonymous says:

    I agree that the Sensex is just an indicator when you are dealing with an individual stock, but it may be important when dealing with MF’s. Let’s say I have units in a large cap MF which I would like to sell sometime in the next few months. Then if I could have some indication where the market may be headed in the short term, I could base my decision on that. Of course, everything is pure conjecture and I may sell at the wrong time, but … 😉

  • Anonymous says:

    >One quesion i would like to put up. Do you really think NIFTY and SENSEX performance should be taken into account for your personal portfolio? As the fluctuations are more out of speculation than anything else. And we retail investors are too immature to understand the economic announcements. Eg : When cement duties were cut by govt., there was a huge downfall in the cement shares. They still haven;t recovered. But in the long run definitely anyday you can invest there.
    Another announcement was cut in some hike in CRR after which bank shares came down. This step was taken by RBI for cutting inflation which itself is a fallout of high economic growth.
    My suggestion is that we shouldn’t really be bothered about short term fluctuations and also these fluctuations should not influence our portfolio decisions.

  • Deepak Shenoy says:

    >Good point – should the Nifty/Sensex affect your portfolio decisions? Well, it’s like this: a rising tide lifts all ships. You may have invested in value companies – those that are growing fast and are very healthy but are not yet recognised by the markets. If so, then the broad market does not bother you.

    but if you invest in growth companies, you will likely place a premium on the shares and the broad market movement will affect your decisions. You need to keep an eye on the sensex/nifty – because they show overall interest in stocks. A rapid lowering of it means a sell in high P/E growth stocks because tehy are sure to get re-rated.

    Momentum investing requires a very close watch on the sensex and nifty levels, as the name indicates.

    Which one are you? Check the P/E of the companies you have invested in. Are they greater than the P/E of the Nifty or Sensex? Then they’re growth stories – otherwise, they may be value.