Nifty P/E multiple up 50% from lows of March
At current level, index valuation 18% lower than its record high price of 30x in June 2019
The continued rally on the bourses despite dismal economic data after the Covid-19 pandemic is widening the gap between index valuation and underlying fundamentals.
At Friday’s close, the benchmark NSE Nifty50 index was trading at a trailing price-toearnings multiple of 25.5x, about 50 per cent higher than its valuation on March 23, 2020, when it had closed at a three-year low of 7,610 points. That day the index P/E multiple had declined to 17.2x — the lowest since May 2014.
At its current level, the index valuation is now only 18 per cent lower than its record high priceto-earnings multiple of 30x on June 3, 2019.
The Nifty is up nearly 35 per cent from its March 2020 lows, even though the underlying index earnings per share continue to drift downwards due to the Covid-19 impact — the nationwide lockdown impacted companies in the last seven days of the January-march 2020 quarter. The Nifty trailing 12-month earnings per share (EPS) works to be ~402 per unit of the index, down 10 per cent since March and the lowest since May last year.
The decline in corporate earnings due to the Covid-19 lockdown has also wiped out the gains made from the income-tax cut, which came into effect from the October 2019 quarter. The Nifty EPS was ~410 before the tax cut, which increased to around ~450 after that.
Analysts attribute the recent surge in the P/E multiple largely to benign liquidity in the market. “A back-ofthe-envelope calculation suggests that nearly 70 per cent of the rise in
P/E since March lows is due to price action rather than earnings contraction. The process has been fuelled by ample liquidity in the market, thanks to unprecedented monetary expansion by major global central banks led by the US Federal Reserve,” said Dhananjay Sinha, head of research and strategy at Systematix Institutional Equities.
He expects the process to continue in the near to mid term and it could actually get amplified as the market continues to get flooded with fresh inflows, especially from foreign portfolio investors.
“We expect the Nifty to hit 12,000 points in the next 18 months even though we expect the index EPS to decline by at least 10 per cent year-on-year by the end of FY21. So gains to investors would largely come from P/E expansion and there is no limit to how much higher earnings multiple can go in the current environment,” added Sinha.
At the broader level, the coronavirus has also wiped out most of the gains in corporate earnings made in the last six years. At current levels, the Nifty EPS is similar to that at the end of March 2014. At that time, the index EPS was ~408 per unit, which subsequently declined to around ~360 by October 2015 due to the fall in commodity and oil prices in 2014-15.
The decline in corporate earnings due to the Covid-19 lockdown has wiped out the gains made from the income-tax cut
This was followed by a mild recovery that gradually pushed EPS higher to around ~410 by early September 2019 and then to all-time high of around ~450 in January this year, thanks to gains from the tax cut.
Not surprisingly, many analysts are now questioning the relevance of value investing, where investors look for cheap stocks. “Value investing is losing relevance now and Indian markets may continue to rise despite a significant contraction in the Indian economy in FY21,” said G Chokkalingam, MD, Equinomics Research & Advisory Services.
He advises investors to participate in this short-term investment opportunity with active periodic profit booking.