Nifty PE Ratio – Most Important Points You Need to Know

Last updated on August 2, 2024

The Nifty PE ratio, also known as the Price to Earnings ratio, is a vital metric that calculates the average PE ratio of the 50 companies listed in the Nifty 50 Index. The terms “Nifty PE” and “Nifty 50 PE” are interchangeable and are used to gauge the current valuation of these companies about their total earnings. Essentially, the Nifty PE ratio helps investors assess whether the markets are overvalued or undervalued, but before diving into its significance, let’s first understand what a PE ratio represents.

What is the Price-to-earnings (PE) Ratio? 

The PE ratio, or the Price to Earnings ratio, measures the relationship between a stock’s share price and its earnings per share (PE ratio = Share Price / Earnings per share). In simple terms, it indicates the price investors are willing to pay for each rupee of profit generated by the company. For instance, if a company has a PE ratio of 36, investors are willing to pay INR 36 for every rupee of profit earned by that company.

Similarly, the Nifty PE ratio reflects the amount investors are willing to pay for every rupee of profit collectively earned by the 50 companies in the Nifty 50 Index.

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What is the Nifty 50 PE ratio?

The Nifty 50 PE ratio is a significant metric that measures the average Price to Earnings ratio of the 50 companies listed in the Nifty 50 Index. PE of Nifty 50 is an indicator of the general valuation of the index. The current Nifty PE ratio today as of 31 July 2024 is 23.40. It serves as a crucial indicator of the health of the stock market and reflects the general valuation of the Nifty 50 Index.

When the Nifty PE ratio is at or above 22, it is considered overvalued, indicating that the market may be relatively expensive. On the other hand, if the ratio falls below 12, it is considered undervalued, implying that the market might be relatively cheaper.

The Nifty 50 average P/E ratio currently falls within the range of 20 to 25. A PE ratio higher than this range may be considered overvalued, while a lower PE ratio may be seen as an opportune time for investment. Historical data from the National Stock Exchange (NSE) reveals that whenever the Nifty 50 has a lower PE ratio, it has provided better returns compared to periods with higher PE ratios.

Over the last 30 years, investors have experienced profitable returns during periods when the Nifty PE ratio hovered around 15-16. Conversely, when the ratio surpassed 22, returns turned negative over the subsequent three years. The Nifty PE ratio reached an all-time high of 40.43 on 20 February 2021, over the past 20 years.

The tables below demonstrate the absolute return on investment in Nifty 50 companies for different PE ratios, providing valuable insights for investors in their decision-making process.

Nifty 50 PE Ratio	3-Years Returns (%)
Less then 12	38.7%
Between 12 & 15	30.7%
Between 15 & 18	17.1%
Between 18 & 21	9.3%
Between 21 & 24	4.4%
Between 24 & 27	-4.2%
Above 27	-7.9%

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Nifty PE Ratio vs Nifty Index Value 

When making investment decisions, relying solely on the Nifty index value is not advisable. A higher index value does not necessarily mean a better investment opportunity. For instance, an index value of 17500 with a PE ratio of 20 is more attractive than an index value of 15000 with a PE ratio of 30.

The concept of mean reversion is significant in the context of indices and is closely linked to the PE ratio. Observing the chart data, it becomes evident that the Nifty index value tends to increase when the Nifty 50 PE falls into the attractive zone. Conversely, the index has tended to correct itself whenever the Nifty PE ratio surpasses 25.

However, it is essential to recognize that these are general observations that unfold over extended periods, often spanning months or years. Consequently, there might be periods when these guidelines do not hold. For example, in 2020, investors still profited despite the index PE ratio crossing 25, and the index even reached a high of 40 in 2021 before earnings improvement led to a decline in the PE ratio to more reasonable levels.

One crucial point to keep in mind is that the Nifty 50 average PE has been rising over the years. Consequently, very old figures may not be the most reliable reference points for making investment decisions.

The table below provides a summary of the value investing rationale for the Nifty PE, offering valuable insights to investors seeking to navigate the stock market wisely.

Nifty PE Ratio Range	Valuation	Market Sentiment	Decision
27-35	Very Expensive	Too much greedy	Don’t buy
22-27	Expensive	Greedy	Exit Booking profit
15-22	Average	Normal	Hold
11-15	Inexpensive	Fear	Buy
< 11	Extremely Inexpensive	Very much fear	A rare event, Buy more

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Key Points About Nifty PE Ratio Chart

#1 Standalone vs. Consolidated 

Over the past decade, numerous Indian companies have engaged in significant overseas acquisitions, contributing substantially to their operations and profits. All companies listed in the Nifty 50 have been involved in acquisitions and mergers. However, it is noteworthy that the Nifty published price-earnings ratio is still based on standalone earnings rather than consolidated earnings. As more companies continue to expand and conduct acquisitions, considering consolidated earnings becomes more relevant, as they can differ significantly from standalone earnings.

#2 Uneven Sector Distribution of Nifty PE Ratio 

The Nifty 50 Index is comprised of various sectors such as FMCG, IT, Oil, Construction, Metals, Retail, and Banks. Among these sectors, FMCG, IT, and Banks hold significant influence over the movement of the price index. In instances where these dominant sectors experience a downturn, even cyclical sectors like construction, metals, and gas may have less impact on the Nifty PE ratio, leading to understated values despite their high EPS. For investors, it is crucial to closely monitor the Nifty 50 in such scenarios to make informed decisions.

Conclusion

• The Nifty 50 PE ratio of 18 signifies that investors are willing to pay 18 times the earnings of the basket of 50 Nifty constituent companies.
• When the Nifty PE ratio falls below 12, it indicates that the Nifty is in the oversold zone. On the other hand, when the Nifty PE crosses 24, it is considered to be in the overbought range.
• Investors can anticipate the market to recover from oversold levels, but this process can take varying durations, ranging from months to years. Similarly, the market doesn’t continuously ascend; it undergoes corrections from overbought levels.
• Smart investors capitalize on the greed and fear cycle, seeking opportunities when Nifty PE levels are in an attractive zone.
• Over the years, the average PE ratio of Nifty 50 has witnessed an increase.

Before making investments, it is crucial to conduct a fundamental analysis and consider a combination of various valuation models.

Happy Investing! 

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