Sensex far from lifetime high, but PE ratio is still zooming

Even as the benchmark Sensex is still 9 per cent or 3,781 points below its all-time high of 42,273.8 hit in January 2020, the valuations have already spiked to comparable levels. The price-to-earnings (P/E) ratio of the 30-share Sensex is currently ruling at 25.68 compared to an average P/E ratio of 25.67 in January, suggesting the market is overpriced.

PE ratio is a measure of market price divided by earnings per share. It indicates how much we are paying for the future earnings.

The PE ratio moderated marginally in February to an average of 24.64. Further, it hovered around 19.5 when the index tested its 52-week low in March. These shudders made markets available at nearly 25 per cent discount from its record high levels in the subsequent months, enticing investors to enter into Indian equities. Consequently, the valuations scuttled back to 25.68 from an average PE ratio of 19.46 in May and 21.8 in June.

Experts say the index is currently looking overvalued as it is trading at a premium of 12.3 per cent from its five-year median and investors might end up paying through their nose in absence of any earnings growth.  

Sensex on Tuesday settled at 38,492.95, up 558 points. As many as 103 scrips ended at 52-week high; 18 among them at their all-time highs. "Indian benchmark indices closed up by around 1.4 per cent, with auto and IT constituents contributing the most to the gains. Some of the stocks rallied on the basis of their earnings results with operating margins and earnings visibility being the key notables. Globally, there was an expectation that the US Fed would continue with its dovish policy stance, which would ensure liquidity, especially into emerging markets like India. Liquidity has been a key driver for the market performance, and the Fed decision is likely to be greeted positively," said Vinod Nair, Head of Research at Geojit Financial Services.

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