NIFTY PE Ratio Discussion

Introduction:

Currently, the market is on a bumpy ride, wherein the benchmark index Nifty 50 marked the all-time high levels of 16,500+, it also got corrected earlier this week. This situation also raised the question of the valuation of Nifty PE on the Investor’s mind, i.e., whether the index is overvalued, undervalued, or fairly valued.

What is PE Ratio & Nifty PE:

• PE Ratio stands for Price to Earnings Ratio. In a simple sense, it refers to the valuation method which measures the current market price of the share to its Earnings Per Share (EPS).
• The Formula for calculating PE Ratio is the Current Market Price of Share divided by Earnings Per Share.
• For Ex. PE Ratio of a company is 100, which means that the investor is willing to pay Rs. 100 for each rupee the stock is earnings.
• Nifty 50 is the benchmark index the represents the weighted average of the 50 largest companies in India which is listed in the National Stock Exchange (NSE).
• Therefore, Nifty PE refers to the average PE of all the 50 stocks in the index.

Nifty 50 Valuation:

• On 1^st January 2021, the PE ratio of Nifty was 38.55. This PE ratio of the index got corrected on 31^st March 2021 from 40.3 to 33 on 1^st April 2021.
• This corrected in the Nifty PE was supported by the changes in the structure of consideration of Earnings by the index. Earlier i.e., until 31^st March 2021, the Standalone Earnings of the companies were taken into account, but from the commencement of Financial Year 2021-22, it considered Consolidated Earnings of the company.
• For Ex., Earlier the Earnings Per Share (EPS) of the Standalone Business of HDFC Limited, Reliance, or any other Companies were taken for calculating PE, but now the consolidated earning of the companies will be taken into account, which will include the EPS from its subsidiaries or associate companies.
• Now, since the consolidated EPS are considered, the denominator in the price-to-earnings ratio formula has increased, and the PE ratio has gone down.
• But the catch here is, from 1^st April 2021, the market has gone up and marked new heights but the Nifty PE ratio has consistently gone down to the levels of 25 from 33 in April 2021. It means that the EPS of the Nifty has gone up.
• The Forward PE of 12 months is hovering around 20-21 depending upon various expectations.
• The range of Nifty PE for long-term is around 18-19 which depicts that market is currently trading at a premium valuation of around 10%-12%.
• The rationalization of the Nifty PE in the market has normalized due to better performance of companies especially in banks like ICICI, Axis, SBI, etc., commodities, and others sectors.

Conclusion:

Hence, it is advised for the investors not to invest only based on PE Ratio. Here the Constant Weight Asset Allocation Strategy can work very well for the investors. Do consult a financial advisor before making any financial and investment decisions.