Are stocks reasonable or expensive? Here’s what Nifty valuations suggest

Vinay Khattar of

Wealth said the market has corrected by almost 16 per cent from top to bottom. He said the value begins to emerge in the 15,000-15,500 range.

Khattar’s FY24 EPS estimates, which were upward of Rs 1,027, have corrected to the Rs 1,000 level, adding that there could be some more downgrades this quarter.

“But we do not see a significant correction or downgrade in Nifty50 earnings for FY24, given the overall structure of the markets and if you study across sectors. If you study Nifty earnings and PE multiples historically, the Nifty50 rarely goes down below 14,000-14,500 levels, except in case of extreme emergencies and that too for very short periods. So 15,000 to 15,500 is an extremely good level for people to start deploying some amount of capital,” Khattar said in an interview with ET NOW.

Here’s what analysts say on Nifty50 valuations:

PE valuations
Since October 2021 high of 23 times, Nifty50’s PE has derated 23 per cent. This includes 14 per cent price correction and 11 per cent time correction. The current PE of 17.4 times is at an 8 per cent premium to the 15-year average of 16.1 times.

On a forward PE multiple basis, Nifty50 trades at 16.1 times, which implies the index target at nearly 17,000, based on Bloomberg consensus June 2024 EPS estimate of Rs 1,060.

Emkay Global said the market is not expensive at present, it should consolidate in the near term. Any sustainable rally depends on tapering in FPI outflows, it said.

Earnings vs bond yields

Among other valuation parameters, Nifty50 yield gap i.e. earning yield less bond yield, has narrowed recently, thanks to the moderation in 10-year G-Sec yield and Nifty P/E de-rating. The current gap of 160 bps (5.75 per cent – 7.35 per cent) is still wider than the 10-year average of -125 bps, indicating that the index remains slightly expensive compared with historical average.

The average yield gap of 125 bps would imply Nifty50’s earnings yield of 6.1 per cent currently or 16.4 times forward PE or the index of 15,100.

Nifty vs EM space

Nifty50 is currently trading at a 62 per cent P/E premium to the MSCI-EM index. This is against a 10-year average of 43 per cent.

“Ceteris paribus, to revert to a 43 per cent P/E premium, Nifty needs to decline by 11-12 per cent in the near term,” Emkay Global said in a note.

It would entail forward P/E going from 17.4 times currently to 15.3 times, or a 14,100 index level, the brokerage said. At a forward P/E of 15.3 times today, Nifty will end-up trading 9 per cent below its trailing 10-year average of 16.9 per cent, Emkay said.

Emkay said FPI outflows in October 2021-March 2022 were driven by India’s ‘expensive’ valuations and global risk-off due to the Russia-Ukraine war. But since March 2022, rupee weakness and rising long-term real yields in the US may have contributed more to FPI selling than ‘expensive’ equity valuations.

What analysts say

Brokerage Prabhudas Lilladher has set a June 2023 target of 19,066 for the Nifty50 on the grounds that the worst may be over for Indian markets as global headwinds subside. Prabhudas Lilladher’s bull case estimate pegs Nifty50 at 21,525 and the bear case estimate pegs Nifty at 15,052.

Emkay Global said the domestic equity market could absorb $3-4 billion per month of FPI selling without significant price damage, assuming MF inflows of $1.5-2 billion, over 70 per cent of it coming via SIPs. It sees non-MF purchases of $1 billion and direct retail equity flows of $500 million-1 billion.

This brokerage sees Nifty50 at 18,000 by June 2023 compared with its previous projection of 19,000 by March 2023. Markets are likely to be in a better place in 12 months, it said in a strategy note,adding that we will likely be past the peaks of CPI inflation, policy rate and bond yields by that time.

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