The benchmark Nifty is trading at an estimated Price to Earnings (PE) ratio, a popular valuation measure, of 28 times — a record — as the index closed at a high of 14,563.45 on Tuesday. The Nifty’s premium is at 48 per cent to its five-year average estimated PE of the past. This is the second time the Nifty forward PE premium over its five-year average has crossed 40 per cent.
When the Nifty traded at a 40 per cent premium over its five-year averages in early 2008, it sustained only for eight trading sessions and corrected nearly 60 per cent between January and October 2008. This time, the index has managed to stay above 40 per cent for 10 straight days.
High valuations show how much an index or a stock is stretched. But investors cannot judge the timing of the market move based on valuation measures.
“No doubt markets are expensive, but this is not a time to sell and exit the market as news flows are very positive currently,” said Sanjeev Prasad Co-head, Kotak Institutional Equities. “However, it’s time to shift from weak mid-cap and small-cap stocks to large-caps, though their valuations are on the higher side”.
There are 18 stocks in the Nifty50 including heavyweights such as Reliance, TCS, Infosys, HCL Tech and HDFC that are trading at a premium of over 40 per cent to their five-year average valuations.
Fund managers said expectations of better earnings over the next few quarters could ease the pressure on valuations.
“On a one-year forward PE multiple basis, Indian markets are not cheap and considering the sharp rally in recent times, one cannot rule out some correction in the near term,” said Mahesh Patil, Co-CIO-Equities at Aditya Birla Sun Life Mutual Fund. “But investors should not be too worried as we are seeing positive surprise to earnings across sectors and expect further earnings upgrades in the current quarter.”
