Equity valuations are once again on the rise, after they cooled down in the second half of 2021 and the first half of 2022.
The BSE Sensex trailing price-to-earnings (P/E) multiple has risen to a 17-month high of nearly 25x, from 23.7x at the end of December 2022 and 21.6x at the end of June 2022.
Similarly, the index closed on Friday with a trailing price-to-book (P/B) value ratio of 3.6x, up from 3.4x at the end of December 2022; it is the highest since December 2021.
While the headline valuation may not look very expensive, it could be misleading due to the large contribution of banks to overall profits of Nifty. A sectoral break-up of net profits of Nifty50 index across shows that the contribution of banks has gone up from 21% in 2022 to 27% in 2023.
In the rally which looks one-way on the larger time frame, the market cap crossed the Rs 50 lakh crore mark in 2007, Rs 100 lakh crore milestone in 2014, and the Rs 200 lakh crore-mark in February 2021. The surge in market capitalisation is a result of not only an increase in stock prices but also takes into account new listings on the stock exchange.
Mid and Small cap spaces have seen a significant run up in the recent months specially after RBI decided to leave the policy rates unchanged after a series of rate hikes till 6.5 percent.
The earnings of India Inc hit a record high in the 2022-23 (FY23) January-March quarter (fourth quarter, or Q4), compared with their poor showing in the previous two quarters of the financial year.
The rise in earnings, however, is exclusively led by banking, financial services, and insurance (BFSI) companies.
A better-than-expected showing by banks and non-bank lenders in Q4FY23 more than compensated for the earnings contraction in the non-BFSI space.