Nifty price-to-book valuation hits pre-Covid level. Why the index is still not cheap

The Nifty 50’s valuation reset has pushed its price-to-book ratio below 3 times for the first time in nearly six years. But investors looking for a broad market bargain may still be too early as earnings-based valuations remain above historical norms, making further gains increasingly dependent on profit upgrades rather than another rerating.

The index traded at 2.95 times book value on July 27, compared with 2.99 times on Dec. 4, 2020, according to DSP Asset Managers’ Netra report. The comparison is more favorable today as Nifty’s implied return on equity has risen to 14.5% from 11.8%, while its price-to-earnings ratio has declined to 20.5 times from 25.34 times.

Still, a lower book-value multiple doesn’t make the index outright cheap. Nifty’s trailing P/E is close to 20 times, while a 15% return on equity and earnings growth of 10% to 12% would justify a multiple of 16.5 to 18 times, DSP said.


“Certainly not,” the report said in response to whether 20 times earnings was cheap. “The index is between fair and average valuations.”

Axis Securities reaches a similar conclusion using forward earnings. Nifty is trading at 18.6 times 12-month forward earnings, slightly above its long-term average of 18.2 times, while its forward price-to-book multiple is in line with the historical average.

“Elevated valuations imply that future market appreciation will increasingly depend on earnings upgrades rather than multiple expansion,” Axis said. Any rerating would depend on the complete resolution of the Iran war and the earnings outlook, it added, making style rotation and sector selection critical for generating alpha.

The return below 3 times PB multiple nevertheless marks a significant reversal. Between September 2008 and December 2020, that level largely acted as a valuation ceiling that Nifty rarely breached. DSP’s one-year forward measure has now fallen below its long-term average.

The quality of the book value remains a consideration. Depressed earnings growth over the past two years has kept Nifty’s return on equity below 15%, even as book value has expanded faster. DSP said that could indicate weak asset turnover, surplus cash, acquisitions or inadequate capital expenditure.

The earnings backdrop is beginning to improve. “India’s growth outlook has clearly improved,” HSBC’s Prerna Garg said.

After a solid March quarter, 73% of companies reporting first-quarter fiscal 2027 results have met or exceeded expectations, with more earnings beats and fewer or smaller downgrades, according to HSBC. Consensus estimates have been raised for commodities, financials, industrials and consumer staples.

Credit growth is holding up, demand has been more resilient than expected and recent Reserve Bank of India policies offer some support to the rupee. HSBC recently upgraded India to neutral within Asia, saying the market is likely to look through any further earnings downgrades as the year progresses.

India continues to command a valuation premium over most emerging markets, supported by stronger earnings growth, corporate governance, macroeconomic stability and favorable demographics, according to Axis. But that premium has narrowed.

Prateek Agrawal, managing director and chief executive officer of Motilal Oswal Asset Management Co., said India’s premium to emerging-market equities is at a 10-year low and valuations are more aligned with historical trends.

“It continues to be time for alpha,” Agrawal said. Banks and information-technology companies, which have significant weights in large-cap indices, have undergone a sharp correction and may appeal to value investors, even if higher-growth segments remain preferable, he said.

The de-rating therefore creates room for selective accumulation, rather than signaling that the entire index is inexpensive. DSP favors gradually raising equity allocations as the market moves toward fair value, while focusing on sectors and stocks trading below long-term valuations where business quality remains intact.

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