Valuations frothy? Profit, mcap moved in sync in 5 yrs

As benchmark indices continue to reach new highs almost every other day, a heated debate rages on: Have stocks outpaced their fundamentals, and can earnings keep up with these valuations? Only time will tell if the earnings growth potential justifies the Nifty 50's current valuation, which hovers at nearly 25 times its FY24 earnings.

- SUNDAR SETHURAMAN & SAMIE MODAK

In the past five years, however, the rise in profit and stock price growth for India Inc have moved in tandem, lending credence to the notion that the markets are slaves to earnings growth.

Consider this: Earnings for Nifty 50 companies increased at a compound annual growth rate (CAGR) of 18 per cent between FY19 and FY24, almost mirroring the growth in market capitalisation during this period.

"This shows that the market is trading at a fair valuation," says Gautam Duggad, head of research of institutional equities at Motilal Oswal Financial Services. "The 10year average price-to-earnings (P/E) multiple is about 20.2x on a one-year forward basis, similar to current valuations." He expects Nifty 50 earnings growth to compound at a 15 per cent CAGR over FY25 and FY26.