The pre-poll rally that added $220 billion of the market capitalisation to Indian equity market in the past one month has catapulted the valuation of the benchmark Nifty50 to a record level. The Nifty’s trailing price-earnings (P/E) multiple touched 25.9 in March 2019, the highest since year 2000, according to Bloomberg data. India has also become the second country, after the US, among major markets to surpass the P/E level prevailing before the financial crisis in 2009.
The Nifty’s current valuation is at 45 per cent premium to the 15-year average. In contrast, the MSCI EM index — a gauge for developing nations, and the MSCI World index — a measure of developed countries index performance, trade 10 per cent and 11 per cent below their respective 15-year averages. In addition, India is now the most expensive market among the top 20 global markets by the market capitalisation.
Nifty’s P/E multiple is two standard deviations away from the mean, a rare phenomenon given that it occurred 44 out of 4,663 trading days in the past 19 years.
Of the 50 Nifty stocks, 19 that include Bharti Airtel, Titan, Asian Paints, and Hindustan Unilever have higher P/Es than the index. These together contribute 48 per cent to the Nifty’s weight. Bharti Airtel with a P/E of 337 is the most expensive stock in the Nifty.
One of the reasons for an expanded P/E multiple is a drop in the denominator, the earnings per share (EPS). In the 12 months to December 2018, the index EPS dropped by 3 per cent year-on-year to ?444.8. This was the first drop in 10 quarters, according to Bloomberg. The Nifty’s current price-book (P/B) value of three is similar to the long-term average. It had peaked six times in December 2007.
