NIFTY PE at 21.5 - What lies ahead?

Nifty is trading at 7963 levels. The current P/E is 21.5 and the EPS is Rs 369.77 which is a 5.5% drop on a YOY basis. 2015 saw a drop in earnings and in this scenario a P/E of 21.5 is a very expensive valuation. The market is expecting a strong growth in EPS in the quarters to come. Some improvement has come in the earnings post Q2 FY 15-16 (September Quarter).

Lets take a look at the P/E chart of Nifty:

Nifty PE Chart

The red boxes show the time when the index was trading at a P/E of 20+ As it can be seen, once the market starts trading above 20 levels it doesn’t slip below 20 and keeps hovering above these levels. It shows that above a P/E of 20 the market’s expectations are very high from earnings growth and any dip near 20 is used for buying. However, when the market’s expectations of growth in earnings are not met, the P/E falls because of a crash in the markets. The market is trading above 20 levels since June 2014. The EPS has however remained near 365-369 zone since then. If we don’t see a pickup in earnings in the coming quarters we can see a major correction in the markets in the coming months.

Nifty EPS Chart

You can see from the above chart of the Nifty EPS that earnings have fallen through 2015 and this is a major cause of concern. Despite a fall in crude prices, interest rates and other factors earnings have not picked up.

At an EPS of 370 and P/E of 20, Nifty’s lower range for the short term works out to 7400. We don’t expect 7400 to break anytime soon. However, if earnings don’t pickup in January then the market can head lower and a 15% correction is possible.

Portfolio Allocation:

What does a fall in earnings and a high P/E mean for your portfolio? 

How much cash to hold in the portfolio? 

How much to invest in bonds? 

What type of stocks to invest in this market? 

Our market view report which we share with our clients twice a month answers these questions based on the interpretation of market valuations and earnings.