According to DSP Mutual Fund’s latest Netra report, the Nifty’s trailing P/E has slipped to roughly 20x, close to its long-period average. At a 15% Return on Equity (RoE) and 10% – 12% earnings growth, DSP argues that fair value is closer to the 16.5x – 18x, meaning the market still isn’t a bargain.
Still, the note observes that after a prolonged de-rating, the index sits between “fair” and “average”, and DSP’s stated stance is now to start raising equity allocations, since every rupee invested buys more units at a reasonable price. A preset, disciplined approach to increasing equity exposure, the report says, tends to work best in such phases.
Midcaps & Smallcaps Still Expensive
While largecaps have cooled off, the note highlights that small and midcap stocks remain stubbornly expensive, with a median trailing P/E of around 38x, well above the 20x historical average, even after two years of consolidation off a 46x peak. DSP flags something unusual: Smallcaps and Midcaps have not meaningfully underperformed largecaps this cycle, unlike prior downturns.
The report treats this as a warning rather than comfort, arguing largecaps now offer better RoEs on a similar earnings trajectory, tilting risk-reward in their favor.
The Valuation Picture
Citing NSE 500 data, the report notes only 32% of largecaps and 33% of Small and Midcaps now trade below 3x their book value, up from 2024’s cyclical lows but nowhere near the 70% seen during Covid-19. Meanwhile, roughly 43% of largecaps and 38% of Smallcaps and Midcaps trade above 6x book. DSP’s conclusion: broad-based value is scarce, making a bottom-up, stock-picker’s approach essential.
The report finds that valuation and profitability are increasingly divergent. 53% of companies trade above 30x earnings, and 18% trade above 60x, yet these priciest stocks post the lowest average RoE (10%) of any profitable bracket. By contrast, DSP notes that 428 companies trading under 20x earnings deliver a healthier 18% average RoE, showing that paying up doesn’t guarantee quality.India’s market is no longer expensive at the index level, but the real opportunity, per the DSP Netra note, lies in overlooked, fairly valued businesses rather than crowded, high-multiple names still riding sentiment.
