Is NIFTY' OVERVALUED? Fundamental View Based on P/E, P/B, Div'. Yld. (A) Nifty' 50’s Price to Earnings (P/E) Price-to-Earnings ratio (P/E) of the NIFTY' is a simple market-valuation ratio. A general guideline to help understand the valuation is:
Current: 28.11 (MAX was 28.26 on 06 & 07th aug '18)
(B) Nifty' 50’s P/B (Price to Book value) Price-to-Book value ratio (P/B) tells us how many times an investor is ready to pay for a rupee of net assets. Since book value is stable and less volatile than earnings, some consider it better than the P/E as a measure of valuation. If P/B > Median P/B = Overvalued P/B < Median P/B = Undervalued
Current: NIFTY' 50's P/B: 3.74 > Median P/B: 3.4 (OVERVALUED)
(C) Nifty' 50’s Dividend Yield (Div'. Yld.) Dividend Yield (Div'. Yld.) is nothing but the return an investor gets in the form of dividend on his investment. It is measured as dividend per share divided by price per share. General Interpretation: When stocks are cheap, dividend yields are high.
#1. Div'. Yld > Median dividend yield => Undervalued #2. Div'. Yld < Median dividend yield => Overvalued
Current Scenario: 1.17, Median Div' Yld: 1.31 Fulfill Criteria #2. Hence Verdict: "OVERVALUED" Historical Ref.: MAX - 2.24%, Min - 0.90%
Technical View: Nifty'50 seems to have exhausted its momentum in the near term. Time cycle suggests a sharp correction is overdue. The upward channel is acting as a strong resistance and it seems that the market will respect the same.
The oscillators have turned distinctly negative (mentioned "MACD" in Chart), suggesting loss of momentum on the upside.
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Comment
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A Balloon needs a PIN. PIN #1 (economy): India’s current account deficit to widen in 2018-19: Top FinMin official. Experts believe that CAD is expected to cross 2 percent of GDP in the quarter ended June against 1.9 percent in 2017-18.
PIN #2 (political): PM Narendra Modi's popularity drops by 4% in 5 months: Report A four percent slide in popularity in such a short time is bound to worry the senior leadership of the BJP as well as Modi himself.
PE RANGE HAS BEEN SHIFTED UPWARD. earlier it was in a band of 12.5 to 25 now it's in a band of 15 to 30, plus pe alone can be a misleading factor in judging market especially when we r in the bottom or high of earning cycle and in here earning cycle has just picked up.
DSKF16
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@KumarAbhilash, Thanks for your valuable comment.
in History: last months of 2007 to mid Jan of 2008, Feb. 2015 etc. like couple of instances were there, where this type of situation occurs, finally market back to it's fundamental ratio.
Companies growing but Profit decreasing, thus Div. Yld is Narrowing.
Another Point related to Market valuation is "Market Cap to GDP" - This measure is Buffett’s personal favourite.
as of July, it was > 77 where Median is 74.5 (approx.).
Finally Market is Above All - let's See what's NEXT.
kacharts
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@DSKF16,
The earnings that we generally expect to grow by 14-15% every year, assuming the real growth of GDP to be 8% and inflation to be 6%.
In the last 4-5 yrs the GDP growth has disappointed. That does not mean we believe the growth rate expected in the future should be lowered, we still believe based on RBI and govt comments that India is a country where to employ a large number of people that join the workforce every year, we need 8% real GDP growth and to achieve that three forces would work,
1) the industrialist themselves
2) RBI might help by lowering interest rates or use other ways to increase economic activity if the industrialist themselves cannot increase their earnings.
3) finally the govt by giving fiscal stimulus which can come from n number of ways.
The nifty value on 31st dec 2007 was 6274 and the PE ratio was 27.62
That Price = Earning * PE ratio
Rearranging the same equation:- Earning = Price / PE ratio . i.e. Earning = (6274/27.62) = 227.15
Today, when the Nifty is trading at 11551 and Pe ratio, is 28.25
Earnings today are (11551/28.25)= 408.88
If you calculate the growth in earnings, CAGR 5.4%
So you understand the growth in Nifty is mostly because of increase in PE
Now the million Dollar question Should we sell today
1) No doubt the PE is high, (But earlier the safest option you had was bank rate of say 8%. So P/E for a bank FD would be 100/8 = 12.5, to earn 1 rs in the bank you had to invest 12.5 rs. Today the bank rate is 6.5%, i.e. the P/E for bank FD is 100/6.5 = 15.4, to earn 1 rs in bank you need to invest 15.4 )
Remember Warren says Interest rate is to the stock market what gravity is to objects on the planet. If the gravity is low, objects move up and if gravity is high, the objects go down. Similarly as interest rates go down the premium we pay for the markets go higher. So the PE of 28 which was considered to be high earlier, was though high but cannot be compared to a current pe of 28 when interest rates have changed from 8 to 6.5%. Note I have not considered tax to be paid on interest in both cases. But yes I will say no doubt the markets are not horribly cheap as of now but its not horribly expensive though.
2) Big IPOs are being able to raise money. I think the biggest IPO of this season is GIC around INR 12000 crores. Still smaller to Coal India INR -9.36% 15000 crores and very small considering the GDP size would have more than double in 7 yrs. Also, the oversubscription is nothing as compare to Coal India or R power IPO . So we are looking for a very big IPO also where the retail participation shows euphoria in terms of oversubscription. But no doubt the IPO market is slightly euphoric.
so at the end I will say still it's not overvalued yes slightly expensive though but not overvalued
DSKF16
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@KumarAbhilash, thanks for the article.
Not in favour of SELL, but should take Cautious Approach.
About barometer of Indian economy -
8 - 10 stock of Nifty 50 outperformed and push Nifty to all time High.
If you see performance of Large Cap stocks (Back Bone of Nation), performed inline & valuation of that stocks devalued.
About your Earning Calculation:
You mentioned in 31st dec 2007 "Earning = Price / PE ratio . i.e. Earning = (6274/27.62) = 227.15 " in USD it was 227.15/39.25 => $ 5.7873
In Current scenario: You mentioned "Earnings today are (11551/28.25)= 408.88 ", in USD it was 408.88/70.5 => $ 5.7997.
Means we are as of Dec 2007. (reason behind Cautious approach)
bhaskar1303
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nice analysis , but if you see the data for past few months this overvaluation ( >24, P/B, Div yield etc) have been this elevated for almost 6 months now and no correction has happened. May be the earnings and other parameters will catch up without the index falling and thus put these parameters in the normal range.