Due to continuous selling in the market, the valuation of India’s stock market has come down to its lowest level in at least 30 months. Currently the benchmark Sensex is trading at a price to earnings multiple (PE) of 21.9 times which is the lowest since June 2022. Excluding the period till June 2022, the current valuation of Sensex is the lowest since June 2020.
Data shows that the current valuation of Sensex is much lower than its normal valuation in the past. There have been only two occasions in the last 8 years when the index was undervalued. There was a sharp decline in the market during the period March-June 2020 during the Covid pandemic and after the end of Corona in June 2022.
In comparison, the index was trading at 24.6 times PE in January 2024 and 24.75 times PE in September 2024. Currently the index is trading about 9.2 per cent lower than the 10-year average valuation of 24.1 times. A sustained decline in the index’s valuation means that the stock price is not keeping pace with the growth in underlying earnings per share.
For example, in the last 12 months, the Sensex rose by 6.2 percent from 71,752.1 points in January 2024 to 76,190.5 on January 23, 2025. During this period, the underlying earnings per share of the index increased by 19.2 percent from Rs 2,921.5 in January 2024 to Rs 3,483.8 on Thursday. In the last three years from January 2022 till now, the index has increased by 31.3 percent while during this period the total income of the 30 companies included in the index has increased by 61.5 percent.
On the contrary, for almost a decade between 2011 and 2021, the index had grown faster than the earnings per share growth, due to which the PE multiple had also increased. The PE of the index was 17.6 times at the end of November 2011, which increased to a high of 34.3 times in March 2021.
Dhananjay Sinha, co-head of research and equity strategy at Systematics Institutional Equity, said, “The persistent decline in the index valuation ratio despite good earnings growth in recent years indicates that investors are concerned about the earnings outlook going forward. Large investors, especially foreign portfolio investors, fear that earnings per share may fall further from current levels. This is why they are selling in the market.
Foreign investors have sold Rs 58,804 crore this month till January 23. Sinha said it is also possible that they may be selling in anticipation of faster earnings growth in other markets like the US.
According to analysts at Motilal Oswal Securities, the earnings per share of Nifty 50 have grown by only 4 per cent on an annual basis in the current financial year, which is much lower than the 18 per cent growth estimated at the beginning of the financial year.