The valuation conundrum: Expensive for short term, attractive in long term

Among expectations, analysts say its important to keep an eye on earnings revision fo Sensex, Nifty

The BSE Sensex hit a record high last week and trades at 19.2 times its one-year forward earnings estimate, compared to the 10-year average of around 17 times. At these valuations, the markets look expensive and vulnerable to short-term correction. However, some analysts see long-term value and believe earnings are expected to enter a high growth cycle.

“While the market appears to believe in a growth turn, it is far from pricing in a multi-year growth cycle, implying significant upside potential in the next three to five years. That said, the next few months might witness moderation in absolute returns and higher volatility,” says Ridham Desai, MD, Morgan Stanley India. 

As a lot of expectations have got built in, say analysts, it is important to keep an eye on earnings revision of Sensex and Nifty components. Analysts revise their earnings expectation for a particular company based on news flow and future projections. If more Nifty components see upgrades than downgrades, then there is scope for the markets to go up, as it results in lowering of valuations, and vice versa. Interestingly, several stocks that are part of the benchmark Sensex and Nifty indices are currently trading at almost twice their long-term trading multiples.