Jayant Manglik of Religare Securities recently wrote an article where he predicts that Nifty will cross 6600 by Dec this year.In the article, he states “our valuations are reasonable. Nifty price to book is at multi-year lows,”
I thought it would be interesting to see how the Nifty P/B fared over the years:
The current P/B of 3.07 is is certainly higher than the 5 year low hit on 27 Oct, 2008 when it was 2.12.The current P/B is however is slightly lower than the 5 Year average of 3.28 and 5 Year Median of 3.3
3 replies on “What is the Nifty Price to Book telling us”
There are one caveats and some observations I would like to add:
Caveat:
The Nifty PB you have shown is possibly sourced from the NSE site. The NSE site shows only standalone book but nearly all Nifty companies have a consolidated book – which is growing. For instance Tata Steel acquired Corus, Hindalco acquired Novelis and so on. To that extent PE and PB are understated.
Observations:
1. A metric quoting at multi year lows does not mean that it is the lowest in absolute terms. It could also mean that the highs were the highest in that multi year period, and the lows may have some more to go :).
2. Nifty constituents keep changing at the rate of 1 – 2 per year, in fact from its peak in Jan 2008, 18 companies have been replaced, so the characteristic of 35% of Nifty has changed since. Of course they may be from the same industry and so on and so forth but the argument holds.
3. By my analysis, the current Nifty constituents have delivered only 10% CAGR profits on their businesses for the six years ending 2013, unlike the 6 years prior to the six year period (2002 – 2007). In other words, the market’s assumption on Jan 2008 of paying 6 times book (or whatever) as fair price has not played out at all. Forget 6 times, the Nifty has not even doubled its book (dividend excluded), you would have been better off in Fixed Income Funds.
4. All in all, we need to be careful to use the immediate past as a guide post to the future, especially if the immediate past seems mroe and more like too good to have been true š
Thanks,
All very valid points.The point of NSE website showing standalone book and not consolidated is interesting-but since the earlier data also shows standalone, the comparison is between apples to apples.Having said that, a P/B is just a thumb of rule estimate of the valuations with no predictive power whatsoever-except at extreme levels (above six or below 2)
Yes, you are right about directional movements. But you know I just had a look at the constituents of Nifty on Jan 01 2008 and here’s where their PE were then (some of the mighty have since fallen):
BHEL – 42
Bajaj Holdings – 46.5
Bharti – 32
HDFC Bank – 41.8
L & T – 63.4
NTPC – 31.9
RIL – 29.6
and lo and behold, RCOM – 56, Suzlon – 44.8, Unitech – 68
With the supreme benefit of hindsight, they all look overvalued now. I am curious where Nifty would have been had they stayed with their constituents (including Satyam), can be a summer intern project for a lad.