What is Nifty PE Ratio?

PE ratio is price to earnings ratio and it is broadly used to identify how cheap or expensive a particular index or stock is. Simply put, P/E ratio implies the amount an investor is willing to pay to earn one rupee as profit. For example, if PE ratio of a company is 25, it means that investors are willing to pay INR 25 for one rupee profit the company earns. As we are going to focus on index PE (specifically Nifty PE), lets extend the same concept to Index. If Nifty PE ratio is 23, it means investors are willing to pay INR 23 for one rupee profit collectively earned by all the companies that are included in Nifty. Here are some historical stats based on Nifty PE ratio provided by Nse India website for your reference:

Having looked at historical stats, here is the chart depicting Nifty PE movement with respect to Nifty Level. Is there any correlation between Nifty PE and Nifty Level? Loosely speaking, Nifty PE tops does seem to coincide with Nifty tops if you look closely.

Nifty PE analysis with Nifty PE Ratio vs Nifty Chart

Nifty PE ratio is important as it is a measure of valuation of all the companies included in Nifty. From long term perspective, low Nifty P/E ratio is considered cheap and ideal for going long. A high Nifty PE multiple on the other hand is assumed to be expensive and warrants caution while taking investment decisions (Booking profit or going short is a better strategy than going long in High PE ratio scenario). The same can be depicted from studying the Nifty PE vs Nifty chart above. When Nifty PE ratio is at its peak (in the range of 25 to 30), nifty is also at its peak and vice versa. It's clear from the chart above that stock market witnesses a sharp sell off when nifty pe is near 25 and witnesses heavy buying when nifty pe ratio is round 12 to 15.

Value Investing by using Nifty P/E ratio

Investors should not judge nifty index or sensex by its value. Nifty at 8900 and Sensex at 29000 are merely numbers and one needs to take EPS of all the constituent stocks into consideration before making an investment decision. Whether the index is cheap or pricey should be judged on the basis of its PE ratio rather than the value. Based on historical data and pure common sense, investors can safeguard their investment portfolio and earn handsome profit by following the investment rationale suggested in following table. 

Valuation Nifty PE Ratio Investment Decision
Very Expensive 25 to 30 It'a a rare event and screaming Sell. Search for shorting opportunities.
Expensive 20 to 25 Book 80% Profit and wait for better entry levels.
Average  15 to 20 Buy or Hold
Inexpensive 12 to 15 Screaming Buy
Extremely Inexpensive Below 12 Rare event. Screaming Buy


To sum it up

Nifty PE 28 में Buy सब करे

Nifty PE < 20 में करे न कोई

जो Nifty PE < 20 में Buy करे

तो दुःख काहे को होय

What is Nifty PB Ratio?

As with Nifty PE ratio, investors can also investigate Nifty PB ratio to gauge if the market is undervalued or overvalued. Normally, the Nifty P/B ration value remains between 2 and 5 (It crossed 6 in 2008 - A sign of the highly overvalued market - See the Nifty PB chart). Just to understand what Nifty PB ratio means, let’s say the current Nifty P/B multiple is 3. This means that on average, the Nifty 50 companies are valued as much as three times than what is actually present in their books. So as the Nifty PB ratio goes up, the valuation gets expensive and vice versa. Nifty P/B ratio of around 2.75 to 3.25 is considered fair as far as market valuation is concerned (Opportunity to hold). P/B of 2 or lower signifies that Nifty is significantly undervalued (Ample opportunity to go long) and P/B of greater than 4.5 signifies Nifty is highly overvalued (Opportunity to book profit). One can compare Nifty PE ratio chart and Nifty PB ratio chart values to get a fair idea about market valuation leading to buying and selling decisions.

What is Nifty dividend yield?

The nifty dividend yield is basically the consolidated dividend yield of all the Nifty 50 companies. One of the ways companies distribute their profit to shareholders is by giving cash dividends and dividend yield is the ratio of dividend amount to price of the share. Nifty dividend yield normally hovers between 1 and 2. Historically, a higher dividend yield (above 2) means the market is undervalued and investors should go long. On the other hand a lower dividend yield (around 1) means the market is overvalued and investors should preferably book profit and stay out of the market till the euphoria cools down. It was around 3 during 2003 signifying the grossly undervalued nature of the stock market at that point of time.

Investors can analyse Nifty PE, Nifty PB and Nifty Dividend Yield values to gauge the overall valuation of market and level of euphoria. Nifty P/E analysis can be used as the primary indicator and Nifty P/B and Nifty Dividend Yield values can be used to confirm the observation. If all the three are pointing towards the same conclusion (Overvaluation or Undervaluation), investors can be fairly sure about their investment decisions, i.e. going long when the market is undervalued and booking profit when the market is overvalued. Please use the Nifty PE chart, Nifty PB chart and the Nifty Dividend Yield chart available on this page to do your analysis.


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