I have seen umpteen investors beginning their discussions with the wrong question: “Is this stock cheap or expensive?”
They look at the number on the screen and assume it carries meaning. But the quoted price is only a denomination, not an insight. It reveals nothing about the underlying strength or weakness of the business.
Similarly,
A stock trading at ₹100 feels approachable. A stock trading at ₹1,000 feels expensive.
Think of a cake. Whether you cut it into six slices or sixty, the cake remains exactly the same. The number of pieces changes nothing about the substance. Stock prices work the same way. The cake is the underlying business — its earnings power, durability, and prospects. The slice is just the share price. Changing the slice size does not change the cake.
Warren Buffett captured this in one line:
“Price is what you pay; value is what you get.”
This discussion matters because valuations influence everything: sector rotations, capital flows, index weightings, earnings expectations, and even how quickly fear spreads through the system. Valuations tell you how optimistic or cautious the market currently is. They also tell you how much future growth is already priced in.
Before we get into the details, here is what we will explore today:
- What valuation actually represents
- Reading valuation metrics in the right context
- Liquidity, loose money, and multiple expansion
- Where do we stand today
Let’s dive in.
What valuation actually represents
Valuation multiples get quoted as if they are exact indicators of worth. They are not. A multiple is simply the market’s way of expressing how much future potential it wants to price in today. The number itself tells you very little unless you understand the assumptions sitting underneath it.
A valuation always reflects three forces moving at the same time:
- The price investors are willing to pay
- Growth expectations embedded in that price
- The risk premium the market assigns to that growth
This is why multiples move sharply even when a company’s actual earnings barely change. The expectations move first. Then the market’s confidence in those expectations changes. The risk appetite shifts continuously in the background. Put together, a valuation becomes less about what the business has done so far and more about what the market thinks the next few years might look like.
Take a simple case.
There’s a company trading at 50 times one-year forward earnings. At face value, that multiple looks demanding, but the market is not reacting to today’s earnings at all; it is pricing in 35% earnings growth that it believes is coming. In that context, 50 times is simply the market’s way of pulling forward the future into today’s price
Now change one variable: if expected growth drops from 35% to 20%, the justification for 50 times disappears immediately. The earnings have not changed, but the stock can still derate sharply because the underlying assumption that supported the multiple has weakened.
This is also why markets behave in ways that look counterintuitive. Stocks can sell off on strong results because the future embedded in the price has shifted. Others refuse to fall despite poor performance because the market is already looking past the weakness. Valuations are never about the last quarter; they are always about the future the market is choosing to believe.
Reading valuation metrics in the right context
A large part of the confusion around valuations comes from treating one metric as an infallible signal. Investors quote P/E, P/B, EV to EBITDA, or price-to-sales, and assume these numbers mean the same thing across sectors. They do not.
Investors often forget this. They compare companies across sectors using one metric and assume the lower number is automatically the better choice. In reality, the wrong lens can make a strong business look expensive and a weak business look cheap.
Here is a more practical way to think about it.
- Price to Earnings (P/E) works when earnings reflect the true economics-
P/E is the most quoted valuation metric, and also the most misused. It works well in businesses where earnings follow a steady, predictable trend and where accounting profit is a good representation of economic profit. In those cases, P/E tells you what the market is willing to pay for each rupee of earnings.
But the moment earnings become cyclical, distorted by reinvestment, or shaped by one-off factors, P/E starts sending the wrong message. A consumer compounder with high reinvestment rates may look optically expensive at 50 or 60 times earnings, even though its return on capital and longevity justify the premium. On the other hand, a commodity or metal company may look “cheap” at 8 times earnings just before a downturn, not because the business is attractive, but because the cycle has artificially inflated the denominator.
P/E also fails in early-stage businesses where the earnings base is too small or too volatile to anchor any meaningful comparison. In such cases, the ratio becomes more of an accounting snapshot than a valuation lens.
- Price to Book (P/BV) works when the balance sheet drives returns-
P/BV works in sectors where earnings flow directly from the balance sheet. Banks, NBFCs, and insurers fall into this category because their assets generate income and their liabilities determine the cost of funds. In these businesses, book value is closely linked to future profitability.
It is also a useful metric in situations where the strength of the balance sheet itself is the investment case — for example, in capital-heavy industries with large tangible assets or in scenarios where liquidation value and asset coverage become crucial. In those cases, P/B gives investors a sense of what they are paying for the underlying assets if the business were to stop operating.
Outside these sectors, the relationship breaks down. An asset-light business that relies on intellectual property, network effects, or software does not scale through incremental capital deployment- take the case of technology companies. Their ability to grow has almost no connection to reported book value.
- Price to Sales works when revenue scales into profit
P/S ratio is often used for young or fast-growing companies where earnings are not yet stable. As a comparative tool, it can be helpful, but only when rising revenue actually improves the unit economics of the business. If higher sales bring the company closer to profitability, P/S gives a rough sense of what investors are paying for future operating leverage.
The metric collapses when revenue growth does not translate into better margins or cash generation. Many consumer internet and platform businesses have high top-line growth but weak contribution margins. In these instances, the P/S ratio offers little insight, because doubts arise on whether that revenue can ever convert into profit.
- When EV/EBITDA gives a fair picture of a business-
Some businesses spend a lot upfront — building factories, opening stores, laying networks — and those costs show up later as depreciation and interest. This can make their net profit look uneven even when the business itself is running smoothly.
In such cases, investors use a simpler measure of performance that strips out these accounting charges and focuses only on the money the business earns from its regular operations. EV/EBITDA compares the company’s overall value with that simpler measure. It is helpful only when the daily operations of the business are stable and predictable.
- DCF looks precise on paper but fragile in practice
DCF tries to answer one big question: “How much money will this business make in the future, and what is that worth today?”
The problem is that this requires a lot of guesswork — how fast the company will grow, what margins will look like, what interest rates will be, how the long-term economy will behave. Even a small change in any of these assumptions can change the final valuation a lot.
DCF works well when the business has steady, predictable cash flows. But when things are uncertain or changing quickly, the model becomes shaky. It can give you a very exact-looking number, but that number rests on assumptions that may not hold.
Liquidity, loose money, and multiple expansion
Markets do not move only because earnings change. They move because the conditions around those earnings change. And over the past 15 years, global liquidity has taken on a scale and speed that earlier cycles never saw. Central banks now cut rates in clusters, as the chart shows. Money supply has expanded through repeated QE waves. Debt levels are significantly higher, forcing policymakers to stay dovish for longer. Dollar and yen liquidity transmit across borders almost instantly.
This backdrop has reshaped market behaviour. Liquidity compresses risk premiums: when the price of money falls, discount rates drop, and multiples move up even before earnings adjust. It also accelerates cycles.
India’s market behaviour reflects this well:
- Post–2008:
The Nifty took 5 years and 2 months to regain its previous highs.
Liquidity was supportive, but the policy response was slower and more domestic. - Post–2020:
The bear phase lasted 7–8 months.
The index reclaimed highs by November 2020, with earnings still stabilising.
This was a global liquidity wave flowing through India.
Loose financial conditions also broaden participation — mid and small caps rerate faster, capital-intensive sectors access cheaper funding, and investors move steadily out the risk curve.
In this regime, liquidity has become the primary accelerator of valuation moves, often overpowering fundamentals in the short run.
Where do we stand today
Last week, we outlined why the market backdrop had shifted enough for us to move from staggered deployment to full upfront deployment keeping in line with your equity allocations. If you missed that edition, you can read it here.
Here’s what the current valuation setup is telling us now:
The first chart shows the Nifty 1-year forward consensus P/E oscillating around its long-period average of 18.2x, with the current reading near 19.9x. It is imperative to read the number in the context of the current cycle:
- FY23–FY25 shows strong GDP momentum (9.2% in FY24, 6.5% in FY25E)
- Capex share in GDP is rising, strengthening the durability of the expansion
- 46% of listed companies reported profit growth above 15% YoY in Q2 FY26, signalling broad-based earnings health
- Inflation expectations have softened and are well within the RBI’s comfort band, creating room for further easing if needed
To put this table into perspective:
- Nifty 500 P/E at 25.9 is below its long-term average of 26.5, indicating broad-market valuations are sitting on the supportive side of history.
- India–China (2.1×) and India–US (1.0×) P/E ratios are both below their long-period averages (2.3× and 1.2×), showing India’s relative premium is comfortable
- India–EM at 1.6×, below the long-term 1.8×, indicates that India’s premium over emerging markets has moderated, adding to the supportive valuation setup.
- The Gold-to-Nifty 500 ratio at 1.9 grams, below its long-term 2.7 grams, signals equities are attractive relative to real assets.
Across all metrics, valuations are sitting below long-period averages, reinforcing a constructive and supportive backdrop.
The next chart tracks two structural valuation anchors — Adjusted Price-to-Book and the Yield Ratio and both are positioned in ranges that have historically supported healthy equity performance.
- Adjusted P/BV is around ~3.1, sitting below its long-term average of ~3.5
- The Yield Ratio is close to its historical mean, indicating that equities remain well-placed relative to bonds
- The overall trend in both metrics reflects a stable, supportive valuation environment
In Summary
Valuations only make sense when viewed in context — as a reflection of growth expectations, risk appetite and the liquidity environment. Each metric behaves differently depending on sector economics, which is why no single ratio can be read in isolation. Liquidity adds a powerful layer: when money is cheaper or more abundant, discount rates fall and multiples expand ahead of earnings.
Today’s setup is firmly supportive. The Nifty’s forward P/E aligns with the strength of the current cycle, India’s valuation premiums versus global markets are below long-term averages, and structural anchors like Adjusted P/BV and the Yield Ratio sit in comfortable ranges.
The opportunity to deploy capital at attractive valuations, supported by improving fundamentals, is rare. The time to act is now.
Disclaimer – The information provided herein is intended solely for educational purposes and is as on date of the document and is subject to change without notice.Any statements about future developments are speculative and should not be taken as guarantees.. In this material, Dezerv has utilized information through publicly available sources, and other data deemed to be reliable. All trademarks, logos, and brand names mentioned are used for identification purposes only and do not imply endorsement or recommendation.