Nifty PE Ratio Analysis: This Time Its Not Different!

There has been lot of buzz surrounding the high valuation of Indian markets these days as Nifty & Sensex continue to make higher highs and lower lows for 6 months in a row. Many investors are flocking over financial portals to find out is there anything to worry for them? Last year we witnessed a heavy fall of over 2000 point in the S&P CNX Nifty Index over a period of 12 months after the Nifty PE peaked at 24.06. Just for your information we are trading at a PE of 24.52 right now. Will the history repeat itself? Or this time it will be different? Read On...

PE Ratio is one of the most widely used indicator of stock market valuation. Stocks with a lower PE Ratio without other negatives are considered undervalued and hence are good for investment. On the other hand, stocks with high PE are considered expensive.

Not just stocks, PE ratio also serves as a great tool when it comes to valuation of the index or the market as a whole.

Nifty PE Ratio is calculated by dividing the sum of market capitalization by the sum of earnings of all companies which constitute the Nifty Index. Don't worry, we don't need to do this calculation manually, the NSE Website has got a very good tool with which we can get historical PE Ratio very easily Click Here

Let's have a look at the Nifty PE Ratio Chart:

Chart Source:

Analysis of past data suggest that whenever Nifty PE is close to 25 market witnesses a sharp sell off and similarly heavy buying is witnessed when nifty PE is in 12 to 15.

Last year peak of Nifty & Nifty PE were 9119.2 & 24.06 respectively in March 2015 from where we witnessed a good correction and Nifty reached 6980 in next 12 months & Nifty PE fell to upto 18.65. From this point we witnessed a good buying again and the index is now trading at 8943 and nifty pe today i.e. 6th september 2016 stands at 24.52. Let's have a look at historical returns of the index

Nifty PE Analysis 2016

The table above shows the historical 3,5 and 7 year return of index when we invest at different levels of price earning ratio. If we invest when the markets are trading at high PE ratio our chances of low or even negative returns also increase substantially., a financial portal suggests following investment decisions for investor at different levels of PE ratio, after its analysis. It further puts "Investors should not judge nifty index or sensex by its value. Nifty at 8900 and Sensex at 29000 are merely numbers and one needs to take EPS of the all the constituent stocks into consideration before making an investment decision. Whether the index is cheap or pricey should be judged on the basis of its PE ratio rather than the value. Based on historical data and pure common sense, investors can safeguard their investment portfolio and earn handsome profit by following the investment rationale suggested in following table." 

Image result for nifty pe ratio analysis

Professor Sanjay Bakashi, a renowned value investor once said, "Recent research done by my firm shows just how dangerous it is to remain invested in an expensive market. Since NSE started, every time when Nifty’s Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative"

With this we believe we have put all available data which we think our readers may find useful for analyzing the market at present levels. Our intent behind writing this post is not predict any crash, downfall or correction but to present all the historical information on Nifty PE and market valuation to retail investors in simple manner.

Past information or historical data is not indicative of what happens in future, but still we can utilize it for our analysis regarding the future. Let's see if this time it will be different or not!

We would love to hear your views on the market valuations in the comments below. So, don't forget to comment & share this with your friends

Happy Trading
The Multiplier
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Write comments
Dinesh Sharma
September 7, 2016 at 10:52 AM delete

Very useful information. Thanks for sharing. Past data do provide lot of valuable information and looks like we are ready for correction but how much, only time will tell.

September 8, 2016 at 12:08 AM delete

Actually we should take current PE with a pinch of salt as Nifty PE can be an illusion as its constitute of stocks from all sector and commodity and bank earning are subdued which is causing this PE look so high ..try removing these 2 sectors and then see the PE ...

Darshan Patel
September 9, 2016 at 4:10 AM delete

H sir can you repost the article about stocks that already hit the yearly bse price cap

Puru ji
September 10, 2016 at 5:52 PM delete

Let see how long the market will sustain at these levels, with this much liquidity.

September 30, 2016 at 4:13 PM delete

Very Useful thanks for sharing amazing post