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CM Strategy

Charts: The Nifty P/E Crosses 27 Again, But….


In what is going to be another boring statistic on how the market is overvalued here’s the one we do often: The market P/E ratio.

The Nifty’s P/E is at a near high at over 27 right now. This sounds high. But it has sounded quite high for a while and the index remains heady and above most logical explanations.

Charts: The Nifty P/E Crosses 27 Again, But....

Remember at the same time, earnings growth (as measured by Index divided by Index P/E) is at -0.46% which is lousy.

There are people who will rationalize this as:

  • Of course this is bad because banking has been rotten. The worst is over and banks will recover. (Now where have we heard that before?)
  • The index earnings are not relevant because companies in the index keep changing. So what, I say. We choose the largest market cap companies to be part of this index, and effectively the highest earners will eventually find a place here – or at least, the ones with the highest earnings growth over time. They should, at some point, on an aggregate basis, reflect that growth – whether it’s 50 companies today or 50 companies later.
  • The P/E doesn’t really matter in some companies like HDFC where it’s better measured as a sum of parts, or a balance sheet basis. This could be true for an individual company, and you could use the Price to Book measure for a stock too, and even that is at a relative high.
  • Forget P/E. The market doesn’t care. Which is correct. How else could you explain this:

Charts: The Nifty P/E Crosses 27 Again, But....

Nifty earnings haven’t grown much. A 10 year rolling average shows you 10 year earnings growth has been less than 5%!

But maybe other indexes are better? Lets see.

Nifty Junior P/E chart

Charts: The Nifty P/E Crosses 27 Again, But....

Again, at 33 P/E this one’s also at a high (though it’s come off the highs recently) and earnings growth is a miserable 3%.

Nothing much to write home about.

And then, the Nifty 500

This is still the broadest index in our stable:

Charts: The Nifty P/E Crosses 27 Again, But....

At 32, the P/E isn’t low. And earnings growth is…no growth.

The Nifty Midcaps

Charts: The Nifty P/E Crosses 27 Again, But....

The Midcap 100 is at an even higher P/E of 52+, with a horrible earnings growth number.

What’s the point?

We’ve had some success in the past when we talked about P/E ratios. In January 2008, we noted that the Nifty P/E was 27. And then the market fell, well, a lot.

In 2015, we noted that the market was richly valued on the CNX 500 at 23, and the market fell about 15% in a few months.

But this doesn’t have muchj value beyond that, honestly. The P/Es have been resolutely high and markets have climbed and continued to climb. Even a broken clock is right twice a day, so just screaming about P/E all the time is not very helpful if it results in no major correction.

What it does do, however, is to keep us rooted. The returns, as they may come, will not be a result of a fundamental undervaluation or a broad market “fundamental” move. It will come because of a stock specific move. Or it will come because of momentum. All returns are good. There’s nothing bad about profit. Just that we should know where it came from.


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