Indian Stock Markets Trading Below Long-Term Averages, But Not Exactly "Cheap":

After the latest dip, India’s key indices, Sensex and Nifty are now trading lower than their one-year forward price-to-earnings (P/E) ratios.

Analysts, however, point out that does not make Indian equities “cheap.” They are said to be better valued than when Nifty’s PE was around 25x and while the long-term average P/E brings some solace, the equities are more reasonably valued than at the peak (which was when Nifty’s PE was around 25x) and the long-term average also provides some solace, they say.

At present, the Sensex and Nifty trade at one-year forward P/E multiples of 19.09x and 18.45x respectively, which is a contraction from their 10-year highs of 19.3x and 18.5x. These September levels of 21.5x and 21.3x, respectively, do mark a notable decline.

Looking at the broader category, BSE MidCap’s current one-year forward P/E is 24.55x against and 10 year average of 24.06x, BSE SmallCap 20.73x versus its 10 year average of 19.02x one year forward P/E.

Aevitas Capital Co-founder and CEO, Anurag Seth states that words like “cheap” insinuate that there is opportunity that cannot be ignored, but we’re not quite there and especially due to risks of FPI outflows and global volatility we’re not quite there.

Currently, all major global indices trade 20-30% higher than their historical averages. According to analysts, India is comparatively appealing if you are a believer in the growth story considering the global indices, but it is not exactly a bargain sale. As for long term players, this seems like a reasonable level to take a position in, but without firmer catalysts for earnings, anticipating a swift recovery might be dreamy, analysts added.

The company is careful with small and mid-caps due to valuation being expensive in many cases. They have been negative for some time and even after the -13 to -18 year to date correction in BSE MidCap and BSE SmallCap indices respectively, they don’t think the valuation levels have been reduced sufficiently capitalized on.

Indian markets have seen a drastic fall from the September marks because of excessive valuations, growth concerns, reduced earnings, and overall global uncertainty, including a feared tariff war post the Donald Trump US election.

Both sensex and Nifty have come down by close to 14% from September level whereas other broader markets were far more impacted as Mid and Small cap indices were down more than 21% and 20% respectively.

A group of experts asserts that, in the last several years, there has been a significant deepening of the Indian markets which has rendered the Nifty and Sensex as mere peripheral indicators of the broader market. As such, the large cap valuations now appear to be reasonable, but those of the broader markets still appear too high considering the rate of earnings growth is slowing.

“Without a substantial upturn in earnings growth potential, or if valuations do not meaningfully correct, the market does not present a favorable condition. Nevertheless, since there is no such thing as timing the market accurately, we advocate a systematic and disciplined approach to asset allocation,” said Pramod Gubbi, Co-founder of Marcellus Investment Managers.

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