Is the Indian stock market fairly valued or overvalued? Experts weigh in

Nifty 50 has gained 24 per cent over the last year, and its current PE (price-to-earnings ratio) stands at 21.9. This is below its one-year average PE of 22.3. However, Nifty’s 12-month forward PE of 20.76.

Nifty’s current PB (price-to-book ratio) is at 4, slightly above its one-year average PB of 4.03.

Also Read: Nifty 50 tops 23k mark; can Indian stock market sustain gains? Experts weigh in

Many experts believe the Nifty 50 is currently overvalued, and a negative surprise in the Lok Sabha election results could trigger a significant market correction. However, if the election outcome aligns with expectations and India’s economic growth maintains its momentum, the Nifty 50 may sustain its current valuation.

Mint spoke to several experts to take their views on the current valuation of the Indian stock market. Here’s what they said:

Deepak Jasani, Head of Retail Research at HDFC Securities

Jasani pointed out that the Nifty quotes at nearly 21 times FY25E EPS and, going by historical trends, is currently at the top end of the valuation. 

Also, according to the market-to-GDP ratio, the Indian stock market is at 1.4 times. Indian markets are, hence, not cheap and are tilting towards the expensive side, he added. 

However, Jasani believes the ensuing event (outcome of the Lok Sabha election 2024) and the expectations built around the post-government formation policy thrust and FPI inflows have led to these valuations. 

“If these come out on expected lines and the monsoon proves normal in intensity and spread, Nifty EPS may be upgraded, and the valuations may seem more reasonable,” said Jasani.

Also Read: General Elections 2024: How different poll outcome scenarios may impact equity, forex and bond markets

Abhishek Jain, Head of Research, Arihant Capital

Jain said the Indian stock market is currently trading at a premium, reflecting expectations of strong growth after Prime Minister Modi’s potential re-election. 

This optimism has pushed valuations higher. However, a correction might occur after the election results, said Jain. 

Corporate earnings will likely drive long-term growth, particularly in manufacturing and other sectors that could benefit from increased foreign direct investment (FDI) under a stable government, he added.

Also Read: Stock market today: Nifty 50, Sensex end flat after hitting fresh record highs; India VIX jumps 7%

Vijay Laxmi A Ambala, SEBI-registered research analyst

Ambala said the current Nifty level is 23,000, and several indicators collectively suggest that the Nifty is currently overvalued. 

The index’s RSI is trading at 76 on the monthly and 67 on the weekly timeframe, indicating overbought conditions. 

Judging by the current price movement and RSI reading, Ambala believes the Nifty may move upward by another 300-500 points within the next month. 

“Those with a short-term view may book up to 30 per cent of their portfolio to capitalise on the all-time high rally while holding on to the remainder to capitalise on the potential upside rally. They can average their profits if there is a healthy dip between 5-8 per cent. The Indian stock market is still in its growth phase and there is ample room for growth, making it more lucrative than most global economies,” said Ambala. 

The current stock market valuation also accounts for the Indian market’s growth potential, suggesting a fair valuation. 

“While price appreciation may slow down, we expect to record double-digit growth in the next three years, supported by sectors like auto, metal, energy, infrastructure, and real estate. IT, media, and service sectors are currently undervalued, making them lucrative. I recommend investing in stocks of core sectors with strong fundamentals to make the most of the prevailing circumstances,” said Ambala.

Sandeep Raina, Executive Vice President-Research at Nuvama Professional Clients Group

According to Raina, the Indian stock market is fairly valued and offers good opportunities. Many stocks and sectors look interesting. 

Historically, the market has peaked at around 24 times the 12-month forward earnings for the Nifty 50, Raina said. 

“We expect EPS (earnings per share) of approximately ₹1,080 for FY25E. Hence, reaching the 24,000 to 25,000 level seems quite possible, assuming the Indian elections proceed smoothly,” said Raina.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.

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Published: 27 May 2024, 06:59 PM IST