Nifty P/E Ratio Analysis

Nifty PE ratio measures the average PE ratio of the Nifty 50 companies covered by the Nifty Index. PE ratio is also known as "price multiple" or "earnings multiple". If P/E is 15, it means Nifty is 15 times its earnings. Nifty is considered to be in oversold range when Nifty PE value is below 14 and it's considered to be in overvalued range when Nifty PE is near or above 22. The market quickly bounces back from the oversold region because intelligent investors start buying stocks looking to snatch up bargains and they do the exact opposite when Nifty P/E is in the overbought region.

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.

Check out what Professor Bakshi (a famous Indian value investor ) has to say about Nifty P/E. Recent research done by my firm shows just how dangerous it is to remain invested in an expensive market. Since NSE started, every time when Nifty's Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative.

History clearly tells us that if you are a passive long term investor you should buy stocks when P/E reaches 15-16 and stop buying when P/E goes above 22. 

The red boxes show the time when the index was trading at a P/E of 20+ As it can be seen, once the market starts trading above 20 levels it doesn’t slip below 20 and keeps hovering above these levels. It shows that above a P/E of 20 the market’s expectations are very high from earnings growth and any dip near 20 is used for buying. However, when the market’s expectations of growth in earnings are not met, the P/E falls because of a crash in the markets. 

Nifty is trading at 7234 levels. The current P/E is 19.5 .

To conclude : Start buying when Nifty is below 18.