nifty news: Chris Wood finds Nifty valuation challenging. Is it really so?


NEW DELHI: Citing Nifty’s PE ratio, which is trading above its long-term average, Jefferies’ global head of equity strategy Christopher Wood had last week described Dalal Street’s valuation as “undoubtedly challenging”.

To find out how expensive are index-level valuations now, let’s look at 3 key parameters:

1) Buffett Indicator
In terms of the market capitalization-to-GDP ratio, which is also known as the Buffett Indicator, the Indian market is not that expensive. The ratio, as measured using India’s estimated FY23 GDP is now at 108% but above the long-term average of 79%.

However, in FY22, the ratio had shot up to 112%. India is cheaper than the US market which is now trading at 161%.

2) PE ratio
The 12-month trailing PE (price-to-earnings) for Nifty is at 22.3x, a 4% premium to its long term average of 21.5x.

On a 12-month forward earning basis, the index is trading at a PE ratio of 18.8x, compared with a historic 10-year average of 17.2x, Wood had said in his report.

3) PB ratio
At 3.4x, the 12-month trailing PB (price-to-book value) ratio for Nifty is above its historical average of 2.9x – at a 16% premium. When seen on a 12-month forward earnings basis also, the PB ratio, at 3x, is at a 12% premium to its historical average, according to a report by .

Is Nifty really expensive?
From a retail investor’s perspective, it is best to ignore top-down market valuations unless one is buying index funds. For stock pickers, bottom-up valuation of individual stocks is much more relevant to make any investment decision.

“The valuations of the main indices may be a starting point for investment decisions but we would dissuade investors from trying to derive any meaningful insights from the same, either in terms of absolute or relative valuations,” says Sanjeev Prasad, Director & Co-head, Kotak Institutional Equities.

He said a large change in the composition of headline indices (particularly, Nifty50) and significant change in the composition of profits broken down by sectors and stocks in the headline indices render historical comparisons quite meaningless.

“The index has seen steady substitution of low P/E companies in the capital goods, electric utilities, metals & mining and oil, gas & consumable fuels sectors with high P/E ones in consumer staples, insurance and retailing sectors and thus, does not make for like-for-like comparison,” Prasad said in a report.

Giving the example of

, he said even within companies, business models have changed, which renders their own historical valuations meaningless.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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