Nifty’s P/E ratio slips below 20x for first time since 2022; right time to buy the dip?

Amidst sustained selling in the equity market due to strong foreign fund outflows, there has been sharp correction in the valuation of the benchmark indices – BSE Sensex and NSE Nifty50 – as measured by the price-to-earnings (PE) ratio. The Nifty50’s trailing twelve-month (TTM) price-to-earnings (PE) ratio has slipped below 20x for the first time since July 2022, while Sensex was trading at a TTM PE multiple of 20.4x, last seen during Covid time. On Monday, the 30-share Sensex ended at 73,086, marginally down by 0.15%, while the Nifty50 settled at 22,119, down merely by 0.02% from its previous close.

The valuation multiples of both the indices - Sensex and Nifty – have nearly halved in the last four years, from their peaks of over 40x. The TTM PE ratios of both benchmarks have dipped below their 5-and 10-year average. The 5-and 10-year average PE ratio of Nifty was 23.9x and 26.7x, respectively, while that of Sensex was 25.4x and 27.5x, respectively.

On the sectoral front, all indices are below their one-year average trailing P/E ratio, except for financial services and energy. On a 5-year basis, trailing P/E ratios below their averages can be seen in financial services, banks, realty, pharma, fmcg, PSU banks, media and auto.

The price-to-earnings (P/E) ratio is a crucial valuation metric in the Indian stock market and it depends on the market and the company's industry. In general, a lower P/E ratio between 12 and 20 is considered good as this range balances risk and growth potential. A high P/E ratio indicates that investors are paying more for the same earnings. It's calculated by dividing the current stock price by the company's earnings per share (EPS). 

Is it the right time to buy?

Valuations across sectors are below their one-year and five-year averages, indicating pockets of potential opportunities for long-term investors, Axis Securities said in a note.

“The current market environment exhibits signs of excessive pessimism and fear – not without reason - which are often precursors to durable bottoms. While a clear bullish trigger is yet to emerge (this is critical), historical patterns, technical indicators, and sectoral valuations suggest that the market is nearing a medium-term bottom,” the report noted.

The brokerage house recommended investors to allocate some long-term money between 21,700-22,000. “While most of us can’t catch the exact top and bottom, prudent investing is about cashing in on opportunities, especially when sentiment is so one-sided. One such opportunity is now.”

Vinod Nair, Head of Research, Geojit Financial Services, said, “With valuations approaching oversold levels, domestic indicators suggest potential for a rebound. However, the longevity of this recovery remains uncertain, contingent on easing global trade uncertainties, which currently show limited signs of improvement."

Nifty in tight bear grip

In the last five months, Nifty has corrected 16% from its September 2024 peak of 26,277, marking the sixth-largest drop since the 2008-2009 Great Recession and the second-largest since the Covid-led crash in March 2020. This five-month downtrend, last seen in November 1996, has raised concerns about a potential bear market, Axis Securities said in its report.

The report noted that breadth measures for the NSE500 index are at extreme lows, with only 7.6%, 6.2%, and 10.1% of stocks trading above their 50-, 100-, and 200-day moving averages, respectively. These levels are comparable to those seen during the Covid crash. On the sectoral front, all indices are in the red year-to-date, with IT (-13.9%) and Media (-34.4%) emerging as top laggards, while Financial Services (-2.1%) and Banks (-10.2%) were the most resilient.

“The Nifty has entered a critical support zone defined by the 100-week Moving Average Envelope (+/-3%), which has historically contained declines except during extreme events like the Covid crash. This suggests proximity to some sort of a durable bottom,” the report highlighted.

From a technical view, Nifty is currently testing the crucial 22,000 support level, which previously served as a launchpad for the rally toward its 2024 peak of 26,277.