Sensex P/E valuations lowest since May '20 amid FPI selloff

India's benchmark BSE Sensex has seen its trailing 12-month price-to-earnings (P/E) multiple plummet to 20.2x, the lowest level since May 2020, as foreign portfolio investors (FPIs) execute a record selloff and analysts warn of further downside risks amid geopolitical tensions and weakening corporate earnings.

There has been a sharp decline in equity valuation in India since the war in West Asia started at the end of last month.

The benchmark BSE Sensex’s trailing 12-month price-to-earnings (P/E) multiple on Friday declined to over a year’s low of 20.2x (20.2 times).

This is the lowest trailing P/E for the benchmark index since May 2020, when the multiple had dropped to 19.56x.

For comparison, the benchmark index was trading at a trailing P/E of 22.3x at the end of February and 23.5x at the end of December.

The index itself is down 9.5 per cent since the end of February and is lower by 13.7 per cent since the start of this calendar year.

Historical Context and FPI Impact

The current valuation is just a notch above its 30-year median earnings multiple of 19.9x.

Historically, during a difficult situation such as the pandemic or the euro crisis of 2011-13, the earnings multiple has always fallen below the median value due to a selloff by foreign portfolio investors (FPIs).

For example, the Sensex’s trailing P/E had fallen to a low of 16.4x during the 2012 crisis from a pre-crisis high of 23x.

During the pandemic, Sensex valuation had shrunk to 18.8x from a pre-pandemic high of around 28x.

Foreign portfolio investors have sold equities worth a record $42 billion since the peak of September 2024, which strongly ties in with India’s earnings downcycle around the same time, according to data from Goldman Sachs.

Outlook on Corporate Earnings and Economic Growth

Analysts see more downside risks for equity valuation in India, given the likelihood of a decline in corporate earnings and overall economic growth owing to higher prices of energy and fertilisers and a decline in the availability of both these commodities.

“The Sensex trailing P/E is likely to fall further to around 18x as equity prices adjust to a potential decline in growth and corporate earnings in forthcoming quarters.

"This will keep equity prices under pressure as investors sell risk assets and move to safer havens,” said Dhananjay Sinha, co-head (research and equity strategy), Systematix Institutional Equity.

Even prior to this conflict, India’s equity markets were struggling with poor growth in corporate earnings.

The index underlying earnings per share (EPS) is up just 1.4 per cent year-on-year in the past 12 months, its weakest growth rate in the past five years.

The index EPS is currently at Rs 3,639, up from around Rs 3,589 at the end of April last year.

This index tracks the combined net profits of the 30 companies that are part of the Sensex.

Impact of Energy Shock and Sectoral Concerns

The current energy shock is likely to put further pressure on corporate earnings and, by corollary, on stock prices.

“A 50 per cent increase in crude-oil prices could lift costs of raw materials by around 25 per cent.

"As a result, the margins for non-financial companies might decline from the current levels of around 16 per cent (of net sales) to around 10 per cent or even lower, risking an outright earnings contraction,” said Sinha.

For comparison, the core operating margins (excluding other income) of companies other than banks, finance and insurance (BFSI) have ranged from 12.4 per cent to 17.6 per cent in the last five years.

According to analysts, the BFSI sector, which accounts for nearly 40 per cent of the Indian equity market, faces an earnings downgrade from a slowdown in credit growth and an incremental rise in bad loans as higher energy prices weaken corporate finances and household budgets.

Goldman Sachs Forecasts and Macroeconomic Headwinds

“We anticipate significant cuts to India consensus earnings forecasts over the next 2-3 quarters.

"We lower our earnings growth forecast materially for India over the next 2 years to 8 per cent and 13 per cent respectively for CY26 and CY27 against pre-Iran conflict estimates of 16 per cent and 14 per cent respectively,” wrote Amorita Goel, Sunil Koul, and Timothy Moe of Goldman Sachs in the latest strategy report on Indian equity.

Equity prices are likely to remain under pressure from a worsening of India’s macroeconomic mix from energy prices staying higher for longer.

“Our economists have lowered India’s 2026 GDP (gross domestic product) growth by 1.1 per cent point to 5.9 per cent, raised CPI (consumer price index) forecast by 70 basis points, widened current account deficit to 2 per cent of GDP, weakened INR, and added 50 basis points rate hikes by the central bank in 2026,” wrote analysts at Goldman Sachs.

Analysts say this will translate into weak inflows of FPIs and lower global risk appetite translating into lower equity valuation.