Sensex at 60K: Stock valuation at highest since Lehman crisis

The market looks pricey on market cap to GDP ratio, which reached a new post-Lehman crisis high of 127.6 per cent on Friday

As the benchmark BSE Sensex hit the 60,000 mark on Friday for the first time, most of the index valuation parameters also touched a new high, with the exception of price to earnings multiple.

The BSE Sensex ended Friday with a trailing price-to-earnings multiple (P/E) of 31.3x, which was nearly 10 per cent lower than its P/E multiple when it first crossed the 50,000-mark on February 3. Analysts, however, say this doesn’t mean that the markets are cheaper than what they were at the beginning of calendar year 2021. 

This is because the index’s current earnings are not comparable with the numbers at the beginning of the year.  There was a sharp decline in index earnings per share (EPS) last fiscal due to a sharp fall in corporate profits in Q1FY21 due to the nationwide lockdown. Corporate profits have since normalised and the last four quarters have seen a sharp recovery in earnings.

The index valuation is at the highest since 2007 on other key parameters such as price-to-book value (P/B) ratio and overall market capitalisation to the gross domestic product (GDP). Sensex’s current P/B ratio of 3.9x is nearly 13 per cent higher than 3.4x in February, when it first breached the 50,000 mark.

The market also looks pricey on market cap to GDP ratio, which reached a new post-Lehman crisis high of 127.6 per cent on Friday. This is nearly 60 per cent higher than the 15-year average of 79.1 per cent for this ratio. The listed companies on the BSE had a combined market capitalisation of Rs 261.2 trillion on Friday against India’s current GDP of around Rs 205 trillion in the 12 months ended June.

The numbers suggest that the current stock valuations can only be compared to the pre-Lehman rally.