InvestorQ : Is the Sensex now looking very attractive in terms of price earnings ratio?
Lavanya Subramanian made post

Is the Sensex now looking very attractive in terms of price earnings ratio?

Anamika Sodhani answered.
1 year ago

The sharp fall in the Sensex is not something anybody would have missed out. For instance, In last one year, Sensex scaled a life-time high of 62,245 and has since corrected by 12.7% to a level of 54,334 levels. In value terms, the Sensex market capitalization has fallen by nearly $400 billion to $3.25 trillion. However, there is a positive side to very story. So, the question is if this sharp fall in the Sensex has made it more attractive in P/E terms?

The answer is that this correction has made the Sensex stocks more than attractive in valuation terms. Currently, the P/E ratio of the BSE stands at 24.07X. The last time the P/E ratio of the Bombay Stock Exchange was lower than the current level was way back in June 2020, when markets were just about recovering from COVID lows. And, remember, back in June 2020, the Sensex was at around 35,000. So the market is a lot more attractive.

There is an interesting story you get to see when you look at the month-P/E ratio of the BSE over the last 24 months. The P/E ratio has fallen from a high of around 35 now to the 24 levels. That is because quarterly results continue to be robust and show solid growth in the last 6 quarters automatically making the markets more attractive. If you take a micro stock-specific view, then many stocks would have become a lot more attractive.

The P/E ratio of 24.07 in March 2022 is lower than the P/E ratio in July 2020, when the Sensex was in the range of 35,000 to 37,000. So markets have effectively fallen very sharply. The effective Sensex levels are much lower than what we are getting to see today. In short the 12.71% correction from the peak of the Sensex may be deceptive and the actual fall is much harder. Investors must keep that in mind when making buy decisions in the market.