Why Nifty isn't Cheap on P/B ratio

Currently Nifty is trading at a P/E of 26 X while the current P/B is 4x.

In last 10 years it had been observed that market had peaked at 25 -28X P/E and the P/B OF 5- 6X

Currently if we look at market it looks near the upper end of the valuation range if we look at P/E ratio which is 26X

But if you look at P/B ratio the market can still go up by 33% since the current ratio is 4X while market tops out at 6X.

There is an anomaly in the data since in last 10 years whenever the market went up to 28X PE the price to book value also rose to 6X

But today the PE is 6X while Price to book value is only 4X

I did some research to find out the reason for this anomaly.

If we look at the share capital of Nifty 50 companies in January 2008 it was total of 2,13,186 crs INR

Today the share capital of Nifty 50 companies stands at 3,62,553 Crs .

Which means that Indian companies have raised share capital to the extent of 1,49 ,367 crs from January 2008 to March 2010.

If we look at the market capitalization it was as follows

·         Market capitalization = Book value * P/B multiple

	Book value	P/B multiple	Market Capitalization
Jan-08	213186	5.95	1268459
Aug-10	362553	3.8	1377702
% Change			8.61%

Therefore we can see that the current market capitalization is already above the market capitalization in January 2008.

If we use this data to calculate the P/B if no additional capital had been raised than the current P/B value of the market is 6.42X which is already above the January 2008 highs.

	Book value	P/B multiple	Market Capitalizations
Jan-08	213186	5.95	1268459
Aug-10	213186	6.46	1377702
% Change

Thus the data supports the fact that markets are already trading at the upper end of the valuation range in last 10 years.

The lower current price to book multiple is also supported by the fact that the current ROE is 22% while the ROE in January 2008 was 30%

The ROE has decreased because of the additional capital raised by the companies.