Insights

Nifty50 is currently undervalued

28 February 2022 • Pulkit Saini

Nifty50’s PE is currently at 21.59x, its P/B is at 4.23x and its dividend yield is at 1.26%. All these valuation multiples indicate that the benchmark index is currently undervalued compared to its average.

This is a critical but often overlooked metric to determine the valuation of the overall market as it helps in understanding whether the market is over-valued or under-valued. It also allows investors to gauge the valuation the market currently trades at and decide their next move accordingly. If markets are overvalued, there is high probability that it will correct soon as per the mean reversion theory and vice versa.

When NIFTY is trading at a higher P/E, P/B and a lower Dividend Yield, it indicates that the overall market is very optimistic on future prospects but there could be a mean reversion at a higher price multiple. Historic Nifty’s mean levels are usually pegged at around 20x-22x P/E. The same applies to a market where the multiples trade at very low values and offers cheap valuation.

These metrics also tell you about the overall optimism/pessimism on D-Street and a fast rise/fall in these levels can indicate an upcoming mean reversion in the future.

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