Valuations of Indian stocks remain red-hot, shrugging off gloomy earnings forecasts, a raging pandemic and an economy on its knees, soaring way past their 12-year average.

According to Bloomberg data, the Nifty index now has had a one-year forward price-to-earnings (PE) multiple of 25.50 times, against its 12-year average of around 20.69 times. The figure touched 28.07 times in August, nearing the record 31.59 times seen in July 2015.

The current crisis has been frequently compared with the global financial crisis of 2008; yet, on 15 September 2008, a day after Lehman Brothers’ bankruptcy filing sparked a global stocks rout, Nifty’s one-year forward PE was as low as 17.60 times. “The sharp rise in Nifty from end-March and the fall in earnings estimates have led to a massive jump in PE ratio for FY21...Valuation multiples are high and not supportive," said Mayank Khemka (chief investment officer India) and Sagar Singh (investment officer, CIO office APAC) of Deutsche Bank in a 28 August report, adding expensive valuations call for caution.

Since the start of FY21, Nifty’s expected earnings for this fiscal and the next have been slashed by 25.33% and 10.85%, respectively. PE is the ratio of share price to earnings per share and is typically used for valuing firms.

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According to Deutsche Bank analysts, equity markets seem to view the current financial year as a blip in the long term, and are looking at FY22 for a return of normalcy in the economy and corporate profitability. They said operating leverage seems to be low and though well protective for large companies, smaller vendors/suppliers can suffer on lack of demand going forward. Whether this leads to further cuts in earnings for the broader market will have to be carefully monitored as the economy staggers back to normalcy in the next few months.

Benchmark indices have gained over 50% from their March lows but are still 7-8% away from their January highs.

Analysts worry that increasing cases of coronavirus will threaten the nascent economic recovery seen in June-July.

“India’s biggest disappointment has been that the “hope story" has been rolled over consistently. This has largely happened either due to domestic constraints or due to global events. India’s GDP was already in a decline pre-covid-19 and the pandemic ensured India’s recovery was pushed out even further," said Amit Shah, equity research head, BNP Paribas.

Shah said there is limited downside, but the market could take a breather in the near term; however, if fundamentals continue to improve into the second half, it should support current valuations. In a bear case scenario, Shah sees a limited potential downside of 9% from current levels and a potential upside of 11% in a bull case scenario.