Sensex valuation falls to its lowest in over 2.5 years amid market selloff

In a year, index has risen by 6.2%, while EPS is up by 19.2%

Amid a sustained selloff in the broader market, the Indian equity market valuation has dropped to its lowest level in over 30 months. 

The BSE benchmark Sensex is now trading at a price-to-earnings (P/E) multiple of 21.9x on a 12-month trailing basis, the lowest since June 2022, when the multiple was 21.6x. Excluding that period, the current valuation marks the lowest level since June 2020. 

This decline indicates that the index’s valuation is now significantly below its historical trend. Over the past eight years, the Sensex has been cheaper only twice: During the March–June 2020 period, at the height of the Covid-19 pandemic-induced lockdown, and in June 2022, following a market correction.

  By comparison, the index was trading at a trailing P/E multiple of 24.6x at the end of January 2024 and 24.75x at the end of September 2024, reflecting peaks during the post-pandemic rally.  

Currently, the index is trading at a 9.2 per cent discount to its 10-year average valuation. Over the past decade, the average trailing P/E multiple for the Sensex has hovered around 24.1x.     

  The steady decline in valuation suggests that stock prices are not keeping pace with growth in underlying earnings per share (EPS). For instance, over the past 12 months, the Sensex has risen by 6.2 per cent, from 71,752.1 at the end of January 2024 to 76,190.5 as of Thursday. During the same period, the index’s EPS grew by 19.2 per cent, from Rs 2,921.5 to Rs 3,483.8. 

 

Over a three-year horizon, the index has gained 31.3 per cent, while the cumulative earnings of its top 30 constituent companies surged 61.5 per cent. 

This trend contrasts sharply with the late 2011–2021 period, when the index consistently outpaced earnings growth. During that period, the trailing P/E multiple rose from 17.6x in November 2011 to a peak of 34.3x in March 2021. The Sensex trebled in value, climbing from 16,100 to 49,500, while cumulative EPS grew by only 57.4 per cent, from Rs 915.6 to Rs 1,440.9.  

Market analysts attribute the current divergence between earnings growth and valuations to investor concerns over the earnings outlook. “A steady decline in index valuation ratios in recent years, despite healthy earnings growth, suggests that investors are worrying about the future earnings trajectory,” says Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equity. He notes that “large investors, especially foreign portfolio investors (FPIs), are expecting a sharp slowdown — or even a decline — in EPS in the coming quarters, prompting them to withdraw money from the Indian market”.  

Indeed, FPIs have been net sellers, offloading Rs 61,563 crore so far this month. Sinha suggests that this selloff could also reflect better growth prospects for foreign investors in other markets, such as the United States, where equities are rallying, or in other emerging economies.  

Concerns about corporate earnings are not unfounded. Corporate profits appear to have plateaued, with the index’s trailing 12-month EPS declining by 0.51 per cent sequentially in Q3FY25 from Q2FY25 levels. Analysts at Motilal Oswal Securities now forecast just 4 per cent year-on-year EPS growth for the Nifty 50 in FY25 — sharply down from the 18 per cent growth projection made at the start of this financial year.