The recent fall in the market has brought the valuation of Nifty below its 5-year average, giving comfort to investors who were concerned over the elevated valuation of the market after a steep rally in the last two years.
Data from Trendlyne show that Nifty50 PE now stands at 21.35, much below the 5-year average of 27.64.
PE, or price to earnings (PE) ratio, is the amount an investor pays to earn a rupee. So, Nifty 50 PE is the amount that an investor pays to earn one rupee of earnings in Nifty50 stocks. Most experts say that if Nifty PE is above 25, it indicates the market is overvalued.
Nifty's valuation was high in the last two years owing to the sharp gains in stocks. Nifty's two-year average PE is 29.27, as per Trendlyne.
However, of late, the market has been on a losing streak as investors have been concerned over inflation and imminent rate hikes. The Russia-Ukraine episode has aggravated the concerns.
FPIs have been taking money out of the Indian financial market since October 2021. In fact, in the financial year 2021-2022 so far, FPIs have pulled out ₹76,928 crore from the Indian financial market.
The markets can sustain high valuations only if the earnings cycle remains on an upward trajectory. A low market valuation can tempt investors to go for heavy shopping.
Should you buy now?
The earnings cycle is on an upward trajectory. The market is a slave of earnings and hence this correction augurs well as valuations have become a lot more reasonable than say a couple of months back," said Devang Mehta, Head – Equity Advisory, Centrum Wealth.
"If we look at the consensus EPS of nearly 1,000 for Nifty for FY24, we can estimate the Nifty to be in a PE band of 15 to 20 depending upon the strength of the economy, earnings cycle, sentiment and course liquidity. It sets the tone for markets to find stability around the levels of 16,000/15,500," Mehta added.
As market valuation is low, it may be a suitable time to buy stocks. However, a mindless buy can do more harm and one should stick to picking quality stocks.
Mehta highlighted that rather than watching the Nifty levels, one should focus on buying or accumulating great businesses.
"Buying in tranches will ensure that one takes advantage of volatility rather than running away from it. The focus should be to be with market leaders and emerging leaders across the large and mid cap space, who have great corporate governance, visible branding, high ROE and ROCEs, pricing power, oligopolistic characteristics, high market share, low or no debt will continue to do well," said Mehta.
Sectors such as private banks, consumer staples, pharma, utilities and IT are the pockets of opportunities, analysts say.
"I think there is a downside due to expected cutback in earnings estimates across multiple sectors, notably BFSI, metals, autos, industrials, capital goods, real estate and Cement. Sectors that are less vulnerable are private banks, consumer staples, pharma, Utilities, Upstream Oil & Gas, and IT," said Dhananjay Sinha, MD & Chief – Strategist, JM Financial Institutional Securities.
