Sensex trailing P/E declines to 22.9x, lowest in the past 12 months

The latest correction in the Indian markets has led to a sharp decline in equity valuations in the country.

 

The trailing price-to-earnings (P/E) multiple of the benchmark BSE Sensex declined to 22.9x on Monday, the lowest in the past 12 months and down nearly 10 per cent from a high earnings multiple of 25.2x at the end of March this year.

 

This valuation is nearly 5 per cent lower than its 10-year average valuation of 24.1x, which is not common.

 

In the past 10 years or 120 months, Sensex valuation has fallen below the

 

10-year average on only 19 occasions. In other words, 81 per cent of the time the market has traded above its long-term average valuation.

 

The benchmark index was down 1.18 per cent on Monday and closed at 78,782 compared to Friday’s close of 79,724. With this, the index is now down 6.5 per cent from its monthly closing high of 84,300 at the end of September.

 

In comparison, the index underlying earnings per share (EPS) is up 1.2 per cent during the second-quarter earnings seasons so far. The index ended Monday with an EPS of Rs 3,446.8 compared to an EPS of Rs 3,406.1 at the end of September.

 

The index EPS tracks the combined earnings (on a trailing 12-month basis) of the 30 companies of the Sensex. 

 

Sensex valuation is on the lower side, given its P/E multiple in the past. For example, in the past five years, the index earnings multiple had ranged from a low of 19x during the pandemic selloff to a record high of 34.4x in the post-pandemic rally. Historically, the index also tended to bounce back whenever its P/E multiple fell below the 10-year average such as in 2016, 2020, 2022, and 2023.  

 

Market analysts, however, don’t expect a quick turnaround in stocks price despite an apparently “low” valuation currently.

 

“On its own the valuation may look attractive compared to what we have seen in the past but the current P/E is still on the higher side if we compare it to the earnings trajectory. Corporate earnings have contracted for a second consecutive quarter in Q2FY25 and the earnings outlook remains pessimistic. This may force a further correction in stock price and equity valuation,” said Dhananjay Sinha, co-head research & equity strategy, Systematix Institutional Equity.

 

According to Sinha, the combined net profits of all companies that have declared their second-quarter results so far are down around 4 per cent year-on-year while the net profits of non-financial companies are down 22 per cent.

 

The current phase is similar to 2015 and 2016, when there was a steady decline in corporate earnings. On that occasion, the Sensex underlying EPS had declined by 15 per cent between January 2015 and November 2016. This had triggered nearly a 24 per cent correction in the Sensex from its then high in February 2015.

 

This time analysts expect a deeper decline in corporate earnings due to a contraction in consumer demand and the growing problem of bad loans among lenders, which is the biggest component of the Indian equity market.

 

“The earnings spread has deteriorated, with only 62 per cent of our coverage universe either meeting or exceeding profit expectations. Consumption has emerged as a weak spot while select segments of banking, financial services and insurance (BFSI) are seeing asset-quality stress,” wrote analysts at Motilal Oswal Securities in their interim results review for Q2FY25.

 

This, coupled with a lack of positive triggers for the equity markets, has heightened downside risks despite a decline in equity valuation in recent weeks.