Indian Equities Trade Below Long-Term Valuations – Still Pricey?

Indian stock markets have witnessed a sharp correction from their September highs, with the Sensex and Nifty declining by around 14%. The broader market saw even steeper losses, with the BSE MidCap and BSE SmallCap indices dropping over 21% and 20%, respectively. This decline has pushed India's benchmark indices below their long-term average one-year forward price-to-earnings (P/E) ratios, raising the question: Are Indian equities cheap now? Analysts argue otherwise, citing ongoing risks and elevated broader market valuations.

Valuations Dip Below Long-Term Averages

Currently, the Sensex and Nifty are trading at one-year forward P/E multiples of 19.09x and 18.45x, respectively, compared to their 10-year averages of 19.3x and 18.5x. This represents a notable drop from their September levels of 21.5x and 21.3x. While this correction makes valuations appear more reasonable than at their peak—when Nifty’s P/E was close to 25x—analysts warn that this does not necessarily make them cheap.

The broader market still shows relatively high valuations. The BSE MidCap index is trading at a one-year forward P/E of 24.55x, slightly above its 10-year average of 24.06x, while the BSE SmallCap index stands at 20.73x, compared to its 10-year average of 19.02x. This suggests that while large-cap stocks have become more reasonably valued, mid- and small-cap stocks remain expensive in many cases.

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Global Market Comparisons and Investor Sentiment

Despite the correction in Indian markets, global indices continue to trade at premiums to their long-term averages. Benchmarks such as the S&P 500, Dow Jones, Nasdaq, DAX, Nikkei, CAC 40, Shanghai Composite, and Hang Seng have not seen similar declines. Analysts believe that compared to these premium-priced global indices, India appears attractive if one believes in its long-term growth story. However, this does not mean Indian equities are available at a fire-sale price.

Anurag Seth, Co-founder and CEO of Aevitas Capital, notes that "cheap" implies a bargain that’s hard to pass up, and Indian equities have not yet reached that stage. Risks such as foreign portfolio investor (FPI) outflows and global volatility continue to loom, preventing a clear buying signal for investors.

Cautious Outlook on Market Recovery

Kotak Institutional Equities, in its latest report, suggests that Nifty’s valuation remains high relative to its expected earnings growth. The firm projects a compound annual growth rate (CAGR) of 14% in earnings for FY26 and FY27, with downside risks to these estimates. As a result, they do not foresee a meaningful upside for Nifty in the short term. On the other hand, India's strong medium-term growth prospects and a potentially improved liquidity environment in the second half of FY26 should provide some valuation support.

The outlook for mid- and small-cap stocks remains even more uncertain. Despite their steep year-to-date corrections of 13% and 18%, respectively, Kotak’s analysts believe their valuations are still not low enough to justify fresh investments. They remain cautious about further downside risks in this segment.

Conclusion

Indian equities may now trade below their long-term valuations, but analysts caution against calling them cheap. While the market correction has brought valuations closer to historical averages, risks such as global economic uncertainty, slowing earnings growth, and continued FPI outflows remain key concerns. Large-cap stocks have become more reasonable in valuation, but mid- and small-cap segments are still on the expensive side. As a result, experts suggest a disciplined and systematic approach to investing rather than trying to time the market. For long-term investors, this could be a reasonable entry point, but a quick rebound may not be on the horizon without clearer earnings catalysts.