Valuations take centre stage as Sensex touches new peak

ET Intelligence Group: Is the market getting overheated? Are the benchmark indices being overvalued? Questions such as these crop up each time the benchmark indices hit new milestones. After the S&P BSE Sensex touched 80,000 briefly on Wednesday, it is imperative to check whether valuations are becoming steep.

One way to ascertain this is to compare the past valuations of the index and the index components with their current valuations. The exercise undertaken by ETIG reveals that the index valuations are still not on a higher side when compared with the past valuations. However, the majority of the Sensex constituents now trade above their respective long-term average valuations. It means investors need to be selective while accumulating blue chip stocks.

Apart from sustained inflow of funds into equities, another reason for the upbeat sentiments is that analysts expect the earnings per share (EPS) of benchmark indices to continue to grow in double digits in the current fiscal year. For instance, Motilal Oswal Financial Services estimates Nifty 50 EPS to grow by 14% and 16% for FY25 and FY26.



To understand the trend in valuations, trailing price-earnings (P/E) multiples were considered instead of forward P/Es to exclude the effect of any aggressive or overoptimistic earnings expectations, which tend to make future valuations attractive. The Sensex P/Es at every 5,000 points since the level of 50,000 (50k) were considered and compared with the current P/E level. In the case of banking and finance stocks, price-book (P/B) multiples were taken into account.

According to the study, the current trailing Sensex P/E of 24.3 is among the lowest compared with the P/E levels when the index was at 50k, 55k, 60k, 70k, and 75k. At 65k, the Sensex P/E was a tad lower at 24.2. The highest P/E was 34.4 when the Sensex touched 50k in January 2021. It came down to 31.3 by the time the Sensex crossed 60k in September 2021 reflecting a pickup in the corporate earnings.

In terms of valuations of individual constituents of the Sensex, 17 out of 30 companies currently trade above their three-year and five-year average valuations.


In the case of banks and finance stocks, five out of the eight stocks including State Bank of India, HDFC Bank, ICICI Bank, Axis Bank, IndusInd bank trade above their long-term P/Bs. Companies including Reliance Industries, ITC, L&T, and Ultratech Cement among others trade above their long-term P/Es.