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

Mumbai: The benchmark Nifty's price-to-book (P/B) ratio has hit a six-year low, falling below three times to a record low of 2.96 times its one-year forward. This drop is attributed to the index's heavy exposure to banks, which have underperformed despite retaining earnings that have boosted their book values. The Nifty's forward P/B is now below 2.96 times, contrasting with its five-year average of 3.18 times and 10-year average of 2.99 times.

Siddharth Purohit, fund manager-equity at InvestValue Capital, attributes the decline to the sector's dominant position within the Nifty and the faster earnings growth in banks compared to the rest of the index. Banks' retained earnings have augmented their net worth or book value, raising the denominator used to calculate P/B. However, the stock prices of major banks like HDFC Bank, Axis, and Kotak Mahindra have lagged behind this increase, resulting in the P/B decline.

The Nifty has dropped 2.64% over the past year and 1.31% over the last two years, with the lower P/B figure also taking into account a change in NSE's book-value methodology, which reduced the P/B from 4.31 times in September 2023 to 3.45 times. While the lower P/B suggests a more moderate valuation relative to companies' net worth, it does not automatically imply a cheap market.

Investors must consider earnings growth and the outlook for profitability in conjunction with the lower P/B multiple.