We take a look at equity valuations for the Nifty 50 in May 2016. In particular, we look at the P/E Ratio, P/B ratio and the dividend yield of the index and compare it to past history.
We use data from the NSE website starting from when it is available in January 1999.
As on 22nd May, the price to earnings ratio of the Nifty was at 22.66 which is higher that its long term average of 18.69. The standard deviation in the data is roughly 3.41 which tells us that the normal range of the PE ratio is between 15.28 and 22.10. This implies that at 22.66, the index is slightly expensive when looked at on the basis of trail earnings.
The price to book ratio of the Nifty was at 3.40 which is close to its long term average of 3.55. The standard deviation in the data is roughly 0.87 which tells us that the normal range of the PB ratio is between 2.68 and 4.42. On the basis of book value, the Nifty is roughly in line with the long term average.
The dividend yield of the Nifty was at 1.32 per cent which is lower than its long term average of 1.46 per cent. The standard deviation in the data is roughly 0.42 which tells us that the normal range of the dividend yield is between 1.04 and 1.89 per cent. This means that the dividend yield is roughly in line with the long term average of the Nifty.
The Nifty is more or less in line with its long term average equity valuations. There is a slight disparity with the P/E showing overvaluation, but this could be explained by the low capacity utilisation in the economy. Firms in the economy are not running at the full level of their capacity which affects profitability due to high fixed costs. Any pickup in demand for affected industries will lead to higher utilisation levels and a non-linear jump in profits. This in turn would cause a spike in earnings and bring the P/E ratio lower.
Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.