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Is Nifty expensive at 16,000 levels? Look beyond the P/E for an answer

Jimeet Modi

CEO, Samco Ventures

Modi believes that price is the most important factor in investing. He is credited with developing the AIRM (TM), an approach to screening stocks and businesses in a scientific manner. His role model is Warren Buffett.

The domestic equity market marched to a new lifetime high and equity markets worldwide remained buoyant, which further bolstered confidence for our indices to continue to move upward after a time correction of nearly two months. With the benchmark Nifty crossing the 16,000 mark this week, the question still remains: What’s next?

Now Nifty50’s average PE has been around 22.39 times and it hit a historic high of 42 times around February 2021, when the market tried to cross the 15,000 mark for the first time. From March till now, the PE has in fact tapered down to 27 times and the current valuation is hovering near the upper band of pre-Covid levels. What is amusing is the fact that Nifty’s PE zigzagged in the 24-29 times band for almost three years between May 2017 and March 2020, a range Nifty hadn’t explored at least since 2006. What this means is that although the levels are elevated, Nifty can remain in this range for some time as it has done in the past.

But this sudden drop from 42 times to 27 times is courtesy two reasons. First, a change in methodology for calculating Nifty PE by using consolidated earnings of companies rather than standalone financials being used since March 31. This indeed caused a massive jump overnight, but there was something else which, to an extent, normalised this drop – EPS growth!

Nifty managed to deliver decadal high earnings growth in FY21, thanks to an infrastructure boom, liquidity inflow and tech-driven efficiency in supply chain, which have aided the rally. Going forward too, given the kind of deleveraging we are witnessing and the cash that companies are holding on to, there will be capex and reinvestment which can unfold a couple of years down the road, driving earnings growth through future themes like ethanol blending, green energy, EV and the likes. So although, optically, the benchmark’s current PE might look expensive, but once earnings grow further, there will be some rerating in valuation. Investors must, therefore, not wait for a correction and instead focus on researching the wealth compounders of tomorrow and invest in them in every dip.

As Peter Lynch says: “More people have lost money waiting for corrections and anticipating corrections than in the actual corrections.”

Event of the week

Amid fears of a third wave of Covid-19 and existing uncertainty in the domestic economic landscape, RBI maintained its accommodative stance. Despite concerns over inflation, the repo rate at 4% and reverse repo rate at 3.5% persist at historical lows to pump in adequate liquidity to bolster economic revival. While this policy support is the need of the hour, it cannot continue forever. If things don’t go as planned, RBI may initiate policy normalisation, starting with a gradual drainage of liquidity followed by marginal hikes in the reverse repo and repo rates, but that doesn’t seem likely at least for a couple of months. Nevertheless, with the current policy acting as a crutch, markets are expected to stand strong with renewed confidence.

Technical Outlook

Nifty50 crossed lifetime highs and closed the week on a positive note, one notch above its consolidation zone. The overall outlook has turned bullish for the time being, since it has taken a clear direction on the upside after some sideways consolidation. If all goes as planned, Nifty might be headed towards 16,500 level with no immediate resistance at higher levels with the bulls all charged up to crush the Call sellers. In the event of a corrective dip, its immediate support would now lie at 16,150.

G16

Expectations for the week

Although market sentiment is expected to remain buoyant, all eyes will be on economic data that will be disclosed in the middle of next week. Data on important economic indicators ranging from India’s industrial output numbers to inflation rate and manufacturing production will keep the market on its toes. It is likely that some of these expectations would be factored in, but any miss on this front could cut short the rally.

In a bull market like this, investors are advised to seek out fundamentally resilient stocks and resist the urge to invest in fast-moving fancy stocks.

Nifty50 closed the week at 16,238, up 3.01%.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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Source: Is Nifty expensive at 16,000 levels? Look beyond the P/E for an answer

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