Nifty Valuations Above Historical Average, Time To Be Cautious

The Nifty trades at a 12-month forward P/E of 21x, a 11% premium to its long-period average, according to a report by Motilal Oswal. The Nifty P/B of 2.8x is at a 10% premium to its historical average, while the index's 12-month trailing P/E of 26.7x is at a 34% premium to its long-period average of 19.8x. At 3.1x, its 12-month trailing P/B is also above its historical average of 2.8x.

In its report "Bulls & Bears India Valuation Handbook", Motilal Oswal Financial Services has noted that the Market-cap-to-GDP ratio has been volatile as it moved from 79% in FY19 to 56% (FY20 GDP) in Mar'20 and 91% at present (FY21E GDP) - above its long-term average of 75%. The Nifty is trading at a 12-month forward RoE of 13.4%, catching up with its long-term average of 13.8%.

Private banks may see increase in slippages

The report notes that private banks are trading at a P/B of 2.9x, at a 17% premium to its historical average of 2.5x.

"Most managements indicated an encouraging asset quality outlook led by a sharp improvement in collection trends and low restructuring guidance. Banks saw massive earnings upgrades on the back of an improving asset quality outlook and recovery in business trends. Slippages are set to increase over 2HFY21 post the SC order on a moratorium of term EMI payments, but we expect the same to normalize from FY22 onwards," the Bulls & Bears India Valuation Handbook states.