Nifty P/B Ratio Drops to 6-Year Low Below 3x

The Nifty’s estimated price-to-book (P/B) ratio has declined to a six-year low, falling below three times, primarily influenced by the banking sector’s significant underperformance.

Key Valuation Metrics

• Nifty One-Year Forward P/B: Below 2.96 times
• Nifty Five-Year Average P/B: 3.18 times
• Nifty Ten-Year Average P/B: 2.99 times
• Banking and Financial Services Weight in Nifty: Approximately 35%

This notable decline in the Nifty’s P/B ratio is largely attributed to the index’s considerable exposure to the banking sector. Major bank shares, including HDFC Bank, Axis, and Kotak Mahindra, have underperformed, even as their retained earnings have increased their underlying book values.

Siddharth Purohit from InvestValue Capital highlighted that while the BFSI sector holds a dominant Nifty position, its earnings growth over the last three years has actually outpaced other index components.

Methodology Shift Alters Metrics

A significant factor contributing to the reported P/B change was the Nifty’s book-value calculation methodology shift in September 2023. The National Stock Exchange (NSE) transitioned from standalone to consolidated financials.

• P/B before shift (standalone): 4.31 times
• P/B immediately after shift (consolidated): 3.45 times

Had the older standalone basis been maintained, the current P/B would stand around 3.7 times, which is slightly above the long-run average of approximately 3.5 times under that same calculation method.

For investors, a lower P/B ratio suggests more moderate valuations relative to companies’ net worth. However, this metric alone does not automatically signal that the market is “cheap.”

Vivek Iyer of Rational Asset Management underscored the necessity to look beyond the headline valuation multiple, urging a focus on the broader earnings cycle. Investors are advised to consider earnings growth and future profitability projections in conjunction with the P/B ratio.