Nifty price-to-book ratio hits 6-year low, but market may not be cheap

The decline partly reflects the index's large exposure to banks, whose shares have underperformed even as retained earnings have added to their book values.

Nifty's one-year forward P/B is now below 2.96 times, compared with its five-year average of 3.18 times and 10-year average of 2.99 times. The six-year low suggests the Nifty is trading at a more moderate valuation relative to the book value of its constituents.

The composition of the index has contributed to the decline. Banks and financial services account for around 35% of the Nifty's weight, the largest sector weight, while earnings growth in the sector has been stronger than rest of the index.

HDFC Bank, Axis and Kotak Mahindra underperforming, their stock prices have not kept pace with the increase in book values, contributing to the decline in the Nifty's P/B.

Read more:India stocks top Indonesia as Asia’s least-favoured in BofA poll

For investors, the lower P/B suggests valuations have become more moderate relative to companies' net worth, but it does not by itself mean the market is cheap.

A lower P/B can result from rising book values, falling share prices or a combination of both, and needs to be assessed alongside earnings growth and the outlook for profitability.

Vivek Iyer, partner & CIO at Rational Asset Management, said investors should look beyond the headline valuation multiple and focus on earnings cycle.

(What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

Subscribe to ET Prime and read the Economic Times ePaper Online.and Sensex Today.

Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

Subscribe to ET Prime and read the Economic Times ePaper Online.and Sensex Today.

Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price