Has Dalal Street entered buy zone? What key valuation parameters suggest

NEW DELHI: The steep fall in domestic stocks has made many investors wonder whether the market has hit the bottom. On the face of it, market valuation still looks rich as suggested by various valuation parameters. But analysts believe, barring a few pockets, valuations are gradually turning reasonable for a host of stocks.

Market cap-to-GDP ratio
Despite the recent fall, Thursday's BSE market cap stood at Rs 249.38 lakh crore and at FY22's advance nominal GDP estimate of Rs 236.44 lakh crore, gives market cap-to-GDP ratio of 105. A value above 100 on market cap-to-GDP ratio, also known as Buffett indicator, is deemed expensive. For India, the long-term average however, has been as low as 79.

Forward PE multiples
The market benchmark Nifty50 has fallen 9.7 per cent in the last four weeks against a 9.5 per cent drop in the MSCI AC World index and a 9.3 per cent fall in the MSCI Asia ex-Japan index during the same period.

At present, Nifty50 trades at a 12-month forward PE ratio of 17.5 times, which is in line with the pre-Covid three-year average, but marginally above the pre-Covid five-year average of 16.9 times, Credit Suisse Wealth Management said in a note.

Beer ratio
BEER ratio is a metric used to evaluate the relationship between bond yields and earnings yields. A value below 1 suggests the market is undervalued. For India, the long-term average stands at 1.2.

On Thursday, India's 10-year bond yield stands at 7.32. Earnings yield is inverse of the PE ratio. At Nifty50's trailing 12-month PE ratio of 20.09, earnings yield comes in at 4.97 per cent. With this, the beer ratio comes in 1.47, suggesting expensive equity valuations.

What analysts said
Sandip Sabharwal, asksandipsabharwal.com said that at around 15,000, the probability of a downside in the index would be 5 per cent and upside potential will be 15 per cent to 20 per cent.

"I would think that will be a good level to start accumulating or for people who do not want to buy, buy more aggressively at those levels because no one can predict where the bottom will be but then we have to buy at a level where we think there is value," he said.

Sabharwal said there is value in many stocks today and that he is not looking at a complete meltdown in the market.

As far as Nifty50 is concerned, Credit Suisse Wealth Management said the index stocks trading at or below their 5- to 7-year average PE valuation, barring stocks from energy, select discretionary, and IT sectors.

"A further 3-5 per cent correction in valuations for Nifty50 will potentially make risk-reward favorable for India as the fundamentals such as corporate leverage and return on equities (ROEs) are much better than pre-Covid levels," it said.

Ajay Srivastava of Dimensions Corporate Finance Services said the market is still seeing public issues at a PE of 100 and above and people are still buying shares at PEs of 50 and above.

"Till the point of capitulation, one cannot say the market has bottomed out. We will see certain very bad days because April-June is a weak quarter. One has to be careful in what we are trading. You do not have to buy every time right? Do you really have to buy every time," Srivastava asked.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)