Sensex, Nifty PE dips below 10-year average. Time ripe for cherry-picking?

The sharp fall in the frontline benchmarks – Sensex and the Nifty 50 – of 11 per cent and 12 per cent, respectively from their peak levels in the last few months has seen their valuation as measured by the price-to-earnings (PE) ratio on a trailing 12-month (TTM) basis dip below the 5-and 10-year averages.

 

The Sensex is trading at TTM PE of 22.2x at the current levels as compared to its 5-and 10-year average of 25.4x and 27.5x, respectively. The Nifty 50, on the other hand, is trading at a TTM PE multiple of 21.7x as compared to its 5-and 10-year average of 23.9x and 26.7x, respectively. 

 

The fall in the PE of these frontline indexes, analysts said, has been largely on account of tepid December 2024 quarter (Q3-FY25) earnings, which in turn triggered a correction.

 

U R Bhat, co-founder and director, Alphaniti Fintech feels that there is more downside in the markets in the weeks ahead, as they have not yet fully discounted slowing corporate earnings growth and a cautious outlook. Global factors, too, are at play, which need close monitoring.

  “There is still some more pain left in the markets. The commentary by companies that have announced Q3-FY25 results thus far has been cautious. Expectation of lower earnings growth in the quarters ahead is also keeping the sentiment in check. That said, one also needs to keep a tab on G-Sec yields. I don’t see great enthusiasm in the investors yet. Investors will be better off staying away from the markets for at least a quarter, wait for what the budget brings and how the corporate earnings growth shapes up,” Bhat said.

 

Midcap, smallcap stocks

 

The case in the mid-and small-cap segments, too, is no different. The Nifty Midcap 100 and the Nifty Smallcap 100 indices at a PE of 37.1x and 26.6x, respectively are trading a tad lower than their 5-year and 10-year PE multiples. The fall in these two segments has been sharper than their large-cap peers. 

Midcap, smallcap, largecap stocks

 

While the Nifty Midcap 100 index at 53,146 levels is down around 13 per cent from its peak levels, the Nifty Smallcap 100 index at 16,728 levels has lost 15.5 per cent from its peak, NSE data shows.

 

If history is a guide (2011–13, 2018–19), then investors, according to analysts at Nuvama Institutional Equities, must brace for longer pain in these two market segments. The current fall, they said, resembles a bear market. A dovish US Fed and sizable domestic easing, they said, are key to turning bullish in the midcap-and the small-cap segments. 

 

During the past (above-mentioned) bear markets, cyclicals (industrials, renewable energy, non-bank finance companies, and public sector banks), they noted, had corrected over 50 per cent. While some stocks have already corrected by a similar amount this time, valuations are still rich, Nuvama cautioned, and margins very elevated, making them prone to larger earnings cuts amid a demand slowdown.

 

Dynamics of the current correction, they said, resemble a bear market as the slowdown is now led by domestic credit, and small-and mid-cap profits after tax (ex-BFSI) have slipped into contraction. Durable liquidity, Nuvama said, has moved into deficit for the first time in the 2020s. 

 

"Even after the correction, valuations in these two market segments are one standard deviation (SD) expensive. This suggests more pain ahead. Stimulative policies are key to reversal," wrote Prateek Parekh and Jatin Somani of Nuvama Institutional Equities in a recent note.

 

From a stock perspective, Parekh and Somani see value in exporters (downturn already quite deep) and domestic laggards (cement, durables, QSR and retail), wherein the slowdown set in earlier and currently low margins are catalysing corrective actions.