Valuation Metrics – March 2020

The Indian benchmark indices have corrected nearly 35% in 2020 and this correction has been fast and furious
because of the shutdown of the socio-economic activity and panic selling amid COVID-19 fears. We present an
analysis of the four key valuation metrics that we have been tracking namely, 1. Market Capitalisation to GDP Ratio,
2. Sensex Earning Yield and India Government Securities Yield Spread and 3. Key Indices -Price Earnings Ratio and
4. Nifty Price to Book

MCap to GDP (Popularly known as Buffet Indicator)

Sensex Market Cap to GDP

Mcap/GDP Mean Sensex RHS

140% 42,500
120%
32,500
100%
80% 22,500
60%
12,500
40%
20% 2,500
Oct-08

Dec-10
Apr-02
May-03

Apr-15
May-16
Mar-01

Aug-06

Jan-12

Mar-14

Aug-19
Jun-04

Jun-17
Jul-05

Sep-07

Nov-09

Feb-13

Jul-18

Source: MOAMC Internal Research. Data as on March 2020 Source: MOFSL Research

Market Capitalisation (M-CAP) to GDP Ratio: The stock market capitalization-to-GDP ratio is a ratio used to
determine whether the overall market is undervalued or overvalued compared to a historical average. As
pointed by Warren Buffett, M-CAP to GDP is “probably the best single measure of where valuations stand at
any given moment”. The result of this ratio calculation is the percentage of GDP that represents stock market
value. The Ratio for Sensex is currently stands at 54%, way below its historical mean of 69%. This ratio is at its
lowest level since 2010 – an outcome of the flash crash seen in the last 22 odd trading sessions.
If we look at Nifty, on financial year basis this ratio stands at 49%, again lowest since the global financial crisis.

GSec Yield – Earning Yield Spread

Gsec Yield to Earnings Yield India

6.00%
42500
4.00%
32500
2.00%
22500
0.00%
-2.00% 12500

-4.00% 2500
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20

Gsec-Eyld Spread Median Sensex

Source: MOAMC Internal Research. Data as on 25.03.2020

Disclaimer: The above graph should not used for development or implementation of an investment strategy. Past performance may or may not be sustained in future.

Government Securities (Gsec) Yield and Sensex Earning’s Yield Spread : If the 10 Year G-Sec yield is going to hover
around 5.75% to 6.00% in next one year, the earning yield has to settle at 3.25% to 3.5% for mean spread to be
maintained. That means PE of ~30. Take a 5% earning growth for next year: at 1800(F21) : and for this to happen
Sensex may have to trade at ~54000-55000 levels.
Source: MOAMC Internal Research. Data as on 25.03.2020
Disclaimer: The above graph should not used for development or implementation of an investment strategy. Past performance may or may not be sustained in future.
Valuation Metrics – March 2020

GSec-Sensex Earnings Yield Spread

The Shrinking spread of yield of Sensex
Gsec-Eyld Median 1 SD 2 SD
Earnings over that of the 10-year Gsec yield
5.00%
is clearly evident in the adjoining graph. It is
currently at 1 SD below the Median. In last
2.00% 20 years, this spread is gone below 2 SD
-1.00% only in twice (in year’s 2004 & 2009). The
rebound to reach the median level followed
-4.00% in the subsequent year - thus proving the
mean reversion characteristic for this
metric.

Price to Earnings

29.00
Sensex PE TTM
PE-TTM MEAN
24.00

19.00

14.00

9.00

Source: MOAMC Internal Research, MOFSL Research, Data as on 25.03.2020

Disclaimer: The above graph should not used for development or implementation of an investment strategy. Past performance may or may not be
sustained in future.

Historic data validates that over the long term, stock market valuation metrics revert to their respective mean.
Many valuation metrics have been tracked over the period of time with this view. In an uncertain environment,
where predicting forward valuations is a challenge, looking at historical data can provide vital clues.
Basic and fundamental parameter among them is the price earnings ratio.

Sensex PE is currently at 17.36 is below the mean value of 18.73.

The Nifty is trading at a trailing P/E of 14.7x, lowest in six years.

Valuation Metrics – March 2020

Price to Book

Source: MOFSL Research. Data as on 25.03.2020

Disclaimer: The above graph should not used for development or implementation of an investment strategy. Past performance may or may not be
sustained in future.

Nifty Trailing P/B is at 1.9x, its lowest since the Global Financial Crisis.

All indicators of valuation – be it Market Cap to GDP, Interest spread, Trailing PE Ratio and Price to Book
valuation - all sliding below their mean at the same time pose a compelling valuation story.

The global risk off trade and a mass exit button pressed by the global passives have little regard for valuations
or fundamentals. The pace of events and uncertainty surrounding them have made the situation extremely
fluid. The pandemic being an ‘unknown-unknown’ we are surely not risking any guesses on its impact on the
GDP growth or the economy. Restrictions on human movement and assembly have directly impacted
production process and service delivery business alike.
The Finance Minister has announced several measures to ease the regulatory and compliance burden for
taxpayers. The FM also promised that an economic relief package will be unveiled soon to alleviate the pain of
lockdown in the economy. While the economic impact of this pandemic is inevitable and unquantifiable at this
stage, we believe that the Indian markets are already discounting some of the pain – Nifty is down 36% from
the recent highs in last one and half months and is now at a four-year low, one of the worst performers globally
since Feb’20. (refer Annexure – Exhibit 1.)

Central banks across the world have sprung into action and we believe that a combined fiscal and monetary
policy action would be required from Indian authorities too.

All we are saying is that we have been surprised on downside, there is a high probability of getting surprised by
upside too.
Valuation Metrics – March 2020

Annexures
Exhibit 1 : India has been among the top laggards in the global equity markets

Source: MOFSL Research. Data as on 25.03.2020. Disclaimer: The above graph should not used for development or implementation of an investment
strategy. Past performance may or may not be sustained in future. Please note not all Indices available are mentioned here in.

Exhibit 2 : Market Snapshot.

Source MOFSL Research, Data as on 25th March, 2020

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