The key benchmark Indian stock market index, Nifty 50, recently breached the 17,500 level and the free-float market-weighted stock market index, Sensex, crossed the elusive 55,000 mark.
The Indian stock market witnessed a bull run and a massive rally for the first time ever and may touch record new levels every day.
Which is why it is extremely important for you, as an investor, to undertake a fundamental check about whether these unprecedented runs are supported by basic data and how much strength these levels possess.
Ravi Singhal, vice chairman, GCL Securities Private Limited, explains why there is no need to worry as stock market indices gain higher levels.
It is a fact that the pandemic has negatively impacted businesses and their earning and profit capacity.
Now, with businesses bouncing back, the earnings of almost every company are showing an upward trend in their quarterly results.
If we take a look at the consolidated earnings of the Nifty 50 companies, the average in August 2020 was almost Rs 358 per share, a number that has been continuously improving since then. It reached an average of Rs 446 in April 2021 and Rs 607 in August 2021.
Therefore, if we look at the P/E data this year, it is continuously on a decline, even though the key indices are touching new levels.
Here's what the data reveals:
| Date | Nifty Closing | Consolidated Earning |
P/E |
| April 1, 2021 | 14,867 | 442 | 33.60 |
| May 3, 2021 | 14,634 | 464 | 31.54 |
| June 1, 2021 | 15,575 | 539 | 28.87 |
| July 1, 2021 | 15,680 | 555 | 28.26 |
| August 2, 2021 | 15,885 | 584 | 27.21 |
| August 12, 2021 | 16,364 | 623 | 26.25 |
When one considers this data, a big question emerges: Is it worth buying in Nifty 50 at 26.25 P/E?
To answer this, we have to look at some key facts:
Historical P/E
FY 2020-21 was an exception, therefore we cannot take the data from this year into consideration while calculating the average.
However, if we look at historical data from the five years before FY'21, the Nifty 50 P/E average was 24.78 from the beginning of FY 2015-16 till the end of FY 2019-20.
| Year | Nifty 50 Average PE |
| FY 2015-16 | 21.78 |
| FY 2016-17 | 22.69 |
| FY 2017-18 | 25.46 |
| FY 2018-19 | 26.60 |
| FY 2019-20 | 27.38 |
Therefore, at the 26.25 level, it is almost six per cent higher than the average of the last five years.
Nifty 50 P/E calculation
As we know, the NSE has changed the calculation method for Nifty 50 P/E; it is now it is calculated on the basis of consolidated earnings of all the companies instead of standalone P/E.
This calculation has changed P/E data significantly.
It is important to note that after that this calculation change came into effect, the Nifty 50 P/E immediately touched 33.2 from 40.43 on March 31, 2021.
Future growth
If we evaluate the P/E of any company or any of the indices, we must look at the future earnings expectations as well.
Current higher P/E may be a result of market expectations of higher earnings in the future.
Conclusion
P/E is the most important factor for market strength analysis and it is running higher than its five year average.
It may be the result of market expectation of higher earnings growth from Nifty 50 companies. At the same time, we also expect that earnings will improve further as the festive season will perform well. The monsoons, too, have been generous across India this year.
Long-term investors -- who have 3-5 years investment horizon -- should not fear the Nifty 50 17,500 level and the 55,000 Sensex level.
Feature Presentation: Rajesh Alva/Rediff.com
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