Nifty price-to-book ratio hits 6-year low, but market may not be cheap

Mumbai: The benchmark Nifty's estimated price-to-book (P/B) ratio, a key valuation measure that compares a company's market value with the value of its net assets or book value, has fallen below three times to its lowest level in six years.

The decline partly reflects the index's large exposure to banks, whose shares have underperformed even as retained earnings have added to their book values.

Nifty's one-year forward P/B is now below 2.96 times, compared with its five-year average of 3.18 times and 10-year average of 2.99 times. The six-year low suggests the Nifty is trading at a more moderate valuation relative to the book value of its constituents.


The composition of the index has contributed to the decline. Banks and financial services account for around 35% of the Nifty's weight, the largest sector weight, while earnings growth in the sector has been stronger than rest of the index.

"The composition of the Nifty has been one of the reasons for the lower P/B," said Siddharth Purohit, fund manager-equity at InvestValue Capital. "While BFSI has a dominant position in Nifty's weight, their earnings growth in the sector over the past three years has been better than other components," he said.

Retained earnings at banks have added to their net worth or book value, increasing the denominator used to calculate P/B. With shares of large banks such as HDFC Bank, Axis and Kotak Mahindra underperforming, their stock prices have not kept pace with the increase in book values, contributing to the decline in the Nifty's P/B.

The Nifty is down 2.64% over the past year and 1.31% over the past two years. The current P/B reading, however, also needs to be viewed in the context of a change in Nifty's book-value methodology. NSE shifted the calculation from standalone to consolidated financials in September 2023, which lowered the reported P/B from 4.31 times to 3.45 times without any change in share prices. On the earlier standalone basis, the current P/B would be around 3.7 times, slightly above the long-run average of about 3.5 times, according to market experts.

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For investors, the lower P/B suggests valuations have become more moderate relative to companies' net worth, but it does not by itself mean the market is cheap.

A lower P/B can result from rising book values, falling share prices or a combination of both, and needs to be assessed alongside earnings growth and the outlook for profitability.

Vivek Iyer, partner & CIO at Rational Asset Management, said investors should look beyond the headline valuation multiple and focus on earnings cycle.