Nifty PE ratio below 5-year average even as index hits new highs

Nifty price-to-earnings (PE) ratio was at 26.54 multiples even as the Nifty 50 share index hit a new high of 17,378 on Monday, September 6, 2021. The Nifty 50 helped by positive Asian sentiments and boost in Reliance Industries share, the key index contributor.

Indian stocks markets have been on a stellar track helped by ample global liquidity, easing lockdown regulations on the back of accelerated vaccination drive and improved domestic economic growth. Weak US jobs data also seemed to have raised hopes that US government will continue with its liberal policy and economic support.

Nifty PE ratio is still below 5 year average

Nifty PE ratio at 26.54 is lower than the 5-year average of 27.43. The Nifty PE ratio is also lower than the 1-year average of 33.55 and 2-year average of 29.88. Nifty PE ratio is a key indicator to read while understanding the valuation of Indian stock market. PE is short for the ratio of a company's share price to its per-share earnings. To calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS). P/E Ratio = Market Value per Share/Earnings per Share (EPS).

Nifty PE ratio moved between a high of 42 and low of 25.21 during the past one year. While on a 5 year basis, Nifty 50 PE ratio moved between a high of 42 and low of 17.15, data from Trendlyne showed.

Does Nifty 50 PE ratio indicate just valuation?

Many market watchers use the Nifty PE ratio to decide on whether the market is overvalued, cheaper or just right. In that sense we have seen a high Nifty PE ratio of 42 in February 2021 when the index reached 15000 levels for the first time. Since then Indian companies have seen good growth on earnings and we see the Nifty PE ratio more reasonable around 26 multiples. There is also a methodology change in the calculation. Now Nifty PE ratio is calculated based on consolidated earnings of companies from standalone EPS earlier.

At this stage the market watchers are divided on whether Nifty PE ratio indicates just valuation. Many believe, accelerated economic recovery and ample global liquidity will help both markets and companies to see positive upside. The other camp believe, from now onwards there will be moderate returns from Indian markets and in case of any global risk off event liquidity will dry up.

Investors should not consider Nifty PE ratio as the only indicator to calculate market valuation but rather look at multiple factors and ratios while deciding on Nifty 50 valuation.