We may have heard people talking about the overvaluations of Indian stock markets on TV channels, social, print media, etc, and a narrative is being created that Indian stocks, especially the mid and small caps are in a bubble zone and markets are vulnerable at these levels. 

In reality, if we look at the historical price-to-earning ratio, normally referred to as the P/E ratio, we find that Indian stocks are nowhere in the bubble zone. The current P/E ratios of all three categories of large, mid, and small-cap are trading at much lower valuations as compared to the historical data.

Let’s have a look at historical charts of the P/E ratio of Nifty 50 representing Large cap, Nifty 50 Midcap, and Nifty 50 Smallcap indices.

The Nifty 50 index is a well-diversified 50 companies index reflecting overall market conditions

The primary objective of the Nifty Midcap 50 Index is to capture the movement of the midcap segment of the market. Nifty Midcap 50 includes the top 50 companies based on full market capitalisation from Nifty Midcap 150 index with preference given to those stocks on which derivative contracts are available on National Stock Exchange (NSE)

The primary objective of the Nifty Smallcap 50 Index is to capture the movement of the small-cap segment of the market. The index represents the top 50 companies selected based on average daily turnover from the top 100 companies selected based on full market capitalisation in the Nifty Smallcap 250 Index

The current P/E ratio of large-cap (23), mid-cap (22), and Small-cap (28) are nowhere near their peak of 31, 69, and 225 respectively.

Moreover, the corporate profits are a long way from peaking out. Chart showing the PAT to GDP ratio, for all three categories of companies viz, Large, Mid, and Small-cap, says it all. For example, the PAT/GDP(Profit after Tax/Gross Domestic Product) ratio of small-cap, presently at 0.7% has much more room for expansion from a long-term cycle perspective. 

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Key Takeaways

  • India is the world’s fastest-growing economy and is slated to grow at 7-8% annually for many years to come. Despite a steep rise in Indian markets, especially the mid and small-cap indices, the P/E ratios are nowhere near all-time highs due to strong corporate earnings growth.
  • Corporate earnings growth in India, lagging behind GDP in the past decade, is now aligning and poised to surpass GDP in the coming years. Rising earnings will boost the stock prices.
  • The Indian equity market presents a compelling investment opportunity with a favorable long-term outlook, driven by robust economic fundamentals and strategic structural factors, though short-term corrections can not be ruled out, especially in the election year in India and the USA. 
  • Don’t miss out on this great Indian growth story. Do allocate a substantial portion of your investments to equity in your portfolio, preferably through mutual funds.
  • If navigating investment nuances proves challenging, you may seek professional assistance for a more informed and tailored approach to wealth creation. Your journey into the Indian market’s promising trajectory can be optimized with strategic and informed investment decisions based on your financial goals.

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Disclaimer: This content is purely for academic purposes and not any kind of investment recommendations. Please do your due diligence or take advice from your financial planner before making any investments. Mutual Fund investments are subject to market risk. Kindly read all the related documents before making any investments. Data Source: finlive and Bloomberg

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