Sensex trailing P/E ratio sinks to pandemic low amid market uncertainty

The persistent selloff in Indian equities has driven valuations to their lowest in over eight years.

 

The BSE Sensex’s trailing price-to-earnings (P/E) ratio dropped to 20.4x on Friday, marking its lowest since May 2020 — excluding during the pandemic-induced sell-off — when it touched 19.5x due to concerns over the economy and corporate earnings.

 

The current P/E is only marginally higher than the July 2016 levels, when it stood at 20.3x.

 

The trailing P/E ratio is a valuation metric that compares a company’s current stock price to its earnings over the previous 12 months. It is calculated by dividing the current stock price by the earnings per share for the previous year.

 

Analysts are attributing this decline to the lingering uncertainty in the markets and fatigue regarding the near-term outlook.

 

At the current level, the Sensex is trading at a 14 per cent discount to its 10-year moving average of 23.6x, the largest such gap since the 2008 global financial crisis, when it peaked at a 34 per cent discount.

 

A similar discount to long-term averages was seen after the dot-com bubble had burst in 2000.

 

The index continued to trade at a discount to its 10-year average (median) valuation for nearly 3 years between October 2000 and September 2003.

 

In the past 25 years, the index has traded at a 6 per cent premium to its 10-year moving average (median) valuation. 

 

Historically, the 10-year moving average has often signalled market bottoms, with the index bouncing back after breaching this level in several years, including 2006, 2012, 2013, 2016, 2020 and 2022.

 

However, this long-term trend now seems to have broken, as the market remains significantly discounted, reflecting investor pessimism, particularly among foreign portfolio investors (FPIs).

 

This heightened scepticism is reminiscent of the 2008 global financial crisis when the Sensex fell by over 55 per cent and its P/E ratio more than halved from 27x to 11.9x.

 

The sharp decline in valuation since September 2024 also signifies the end of a 25-year cycle of steady equity rerating in India.

 

This steady rerating of Indian equities pushed the index trailing P/E from around 16x in the early 2000s to around 18x during the Manmohan Singh regime to nearly 25x at its peak in the post-pandemic era.

 

The rerating was initially fuelled by a sharp rise in the investments by foreign portfolio investors in the early 2000s but in the last decade, the rerating was driven by an influx of domestic retail investors.

 

Analysts suggest the decline is due to a "re-alignment" between stock prices and a bleak outlook for future earnings growth.

 

“In the past five years, the corporate earnings grew at an annualised rate of nearly 20 per cent and so were the stock prices. But in FY25, the Sensex companies’ earnings are likely to grow by only 4 per cent and it will at best 6-7 per cent in FY26 given demand slowdown in India and global trade uncertainty,” said Dhananjay Sinha, cohead, research and equity strategy at Systematix Institutional Equity.

 

A growth slowdown in India has forced FPIs to pivot to markets with relatively faster growth and lower valuations such as China and the United States, he noted.

 

“This market correction has coincided with a slowdown in earnings growth, as the Nifty 50 has managed only 4 per cent growth in profit after tax in 9MFY25, compared to a healthy 20 per cent CAGR during FY20-24 period,” according to analysts at Motilal Oswal Securities in their recent results review.