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Is the Nifty Overvalued?


The Nifty trades near its all time high, at 4214 today. Is this too high? We have come up more than 60% from the June 14, 06 low of 2632. Everyone seems to be skeptical and is waiting on the sidelines, but is this market really overheated?

On May 10, 2006 the markets were at their last highs – on May 11, the markets crashed and fell nearly 30% from there. So what was the Nifty doing at that time? On May 10, the Nifty closed at 3754, at a P/E of 21.28, which translates to an EPS of Rs. 176. Today, the Nifty’s at 4214 with a P/E of 20.18 – that means an EPS of 209.

That means, since the last peak of the Nifty, the markets have moved up 12.25%. And earnings have moved up 18.37%! Is it really irrational? If this continues for three more quarters, the effective P/E at todays rate is 17.5 – which is quite reasonable for an annualised earnings growth of 24% in the top companies.

Interestingly, this is after moving out low P/E companies like Tata Tea and SCI and replacing them with High P/E companies like Suzlon and Reliance Communications. Usually, such a move would have resulted in a spike in the Nifty P/E, but earnings growth has left it steady – that means the real earnings growth has been even more stronger than the 18% noted.

I expect the budget to boost earnings, but pare down speculative growth. That will probably not affect the Nifty very much, and almost definitely will push earnings growth to stay at current levels. That leaves room for growth from here – the market is at a high, but it’s definitely not overvalued.

(Read the Nifty details)


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