Are Markets In Bubble

Are Markets In Bubble

Over the last week, the #Indianstockmarkets have gone through ebbs and flow, with many FIIs selling to book profits. Some analysts have even mentioned that this correction was due as stock prices soared. So i decided to value the #nifty50 to check whether the markets are really in a bubble.

Valuing an index like Nifty is similar to valuing a company. An investor’s cash flows while investing in stocks are dividends and buybacks. However, in India, companies do not pay all their earnings to investors as dividends, and in recent years, companies, especially in IT services, have started buying back shares. Thus, i take the cash flows to investors as earnings from Nifty as potential dividends and buybacks that companies should have returned to their investors but have chosen not to due to their intent to reinvest in future projects.

As of today, the Nifty numbers are below:

Price – 17890.35
EPS – 686.2
P/E – 17890.35/686.2 = 26.07
Earnings in 2021 = 515.24
Expected earnings in 2022 = 684.75 (33% growth)

I assume that from 2022-2026, earnings will grow by 20%, and then at the Terminal year, the earnings growth will equal a risk-free rate.

The current Total Equity Risk premium = 6.85% and Risk free rate = 4.19%. Beta = 1

WACC = 4.19% + 1*(6.85%) = 11.04%

Discounting the cash flows, i get the value of #niftyfifty as 15575.39.

Thus, in my view, the Nifty is slightly overvalued (~12%), but if someone tells me that the markets are in a bubble, I beg to differ.