Many of my friends tell me that the stock market is different this time compared to the last time. They see growth in India and believe that India will grow and hence the stock markets are reflecting that type of growth.
I believe that India is a growth story but still the kind of valuation we are seeing is not reflecting the growth.
Yesterday Nifty closed at 6135.85 and had a PE ratio of 25.51. So our bluechips earnings should grow at 25% every year to justify this kind of valuation.
I did a quick data check on when Indian market cracked on the basis of PE ratio.
During the crash of 2008 - On 8th Jan 2008 - Nifty Level was 6287.85 and PE ratio was 28.29 and the market started falling after reaching this peak.
During the crash of 2000 - Market peaked on 11th Feb 2000 - Nifty Level was 1756 and PE ratio was 28.47.
With the current PE ratio of 25.51 , there is headroom for Nifty to increase. But a level of 28 PE will become unstable and we might see a correction. We might see a level of 6800+ but then a correction will be inevitable.
10 year PE ratio averages to 18 , which give a target of 4330. If the Nifty earnings grow by 15-20% we might see 5000 on Nifty again.
Thanks
Ratan
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