Nifty price-to-earnings down 10%, still above long-term average

The benchmark Nifty index currently trades at 16.8 times its 12-month forward earnings estimate. At January-end, when the index had climbed to a record high, the 50-share blue-chip index traded at a price-to-earnings (P/E) multiple of 18.6 times.
 
The 10-year average P/E for the Nifty index is 15 times — nearly 14 per cent below the current level. Analysts say current market levels are close to their ‘fair-value’ and if the correction extends by another 5 to 10 per cent, valuations become ‘attractive’.
 
Markets tend to overshoot or undershoot their ‘fair value’, depending on the prevailing sentiment.  For instance, last year the markets traded an average P/E of 17.8 times — 20 per cent above their long-term average — supported by strong liquidity and hopes of an earnings recovery.
 
Analysts say signs of a pick-up in earnings help in re-rating (expansion of P/E ratio) of the market. However, if economic growth and earnings continue to remain sluggish and bond yields continue to harden, there is a risk of the market getting de-rated (lowering of P/E), they warn.