Nifty 50 Valuation Report – July 2023

Nifty 50 Valuation Report

As on July 30, 2023

Prepared by : Rajat Kulshrestha

Guided by : Parth Verma
Nifty 50 Valuation Report – July 2023

S.No. Particulars
1 Introduction
2 Context of Valuation
3 Approach & Methodology
4 Valuation
5 Sources
Nifty 50 Valuation Report – July 2023

1. Introduction
1.1 Background

• National Stock Exchange of India Limited (NSE) is one of the leading stock exchanges in India, based in Mumbai. NSE was the first
exchange in India to implement electronic or screen-based trading which began its operations in 1994; a pioneer in technology which
ensures the reliability and performance of its systems through a culture of innovation and investment in technology.
• The National Stock Exchange of India Limited (NSE) is India's largest financial market and the fourth largest market by trading volume.
• The NSE is the largest private wide-area network in India. The NIFTY 50 is a diversified 50 stock index accounting for 13 sectors of the
economy.
• The NSE has been a pioneer in Indian financial markets, being the first electronic limit order book to trade derivatives and ETFs.

1.2 Key Stats

• The Nifty 50 stocks represent about 66% of the total float adjusted market capitalization of the National Stock Exchange (NSE).
• The Average historical CAGR returns provided by the Index for various periods are :
a) 20 years CAGR Return- 12.44%
b) 15 Years CAGR Return- 10.32%
c) 7 Years CAGR Return- 9.51%
d) 5 Years CAGR Return- 9.61%
 Nifty 50 Valuation Report – July 2023

1. Introduction
1.3 Composition of NSE
• Nifty 50 index has stocks of 50 Companies.
• The index represents 50 companies selected from the universe of Nifty 100 based on freefloat market capitalisation and liquid
companies having average impact cost of 0.50% or less for 90% of the observations for a basket size of Rs. 10 Crores.
• Reliance Industries Ltd., HDFC Bank Ltd., ICICI Bank Ltd., HDFC, Infosys Ltd., ITC Ltd., TCS, L&T, Kotak Mahindra Bank Ltd., Axis Bank Ltd.
• The index comprises wide range of sectors such as Conglomerates, Financial Services, Information Technology, Energy, Telecom, Metals,
Infrastructure, Automotive to name a few.

1.4 Sector wise contribution in Nifty 50

Sector Weightage (%) Sector Weightage (%)
Banks 37.59% Metals and Mining 3.52%
IT Consulting & Software 12.65% Consumer Durables 3.30%
Oil, Gas and Consumable Fuels 11.99% Telecommunication 2.61%
FMCG 9.82% Power 2.10%
Automobile and Auto Parts 5.98% Construction Materials 1.89%
Healthcare 3.86% Services 0.74%
Construction 3.54% Chemicals 0.41%
Nifty 50 Valuation Report – July 2023

2. Context of Valuation
2.1 Context
• The uncertain events of FY 2022-23, such as the tightening of interest rates and the Russia-Ukraine crisis, can have a
significant impact on the Sensex.
• The largest winners of the year were the banking stocks, particularly the PSU banks. In December, the Sensex achieved all-
time highs. Despite the dire status of the global economy, the Sensex and Nifty 50 Index are up by more than 7% in 2022.
It demonstrates the resilience of the country's retail investors.
• The top movers on the Nifty 50 Index were TCS, Infosys, Tech Mahindra, LTIMindtree, HCL Tech, Whereas, the top losers
were HDFC Life Insurance, Power Grid, Titan, Dr Reddy Laboratories.
• The Valuation report aims to determine the valuation of the Index in the above context.
• The Index has been valued considering the dividends paid, buyback yield, Future Earnings Growth, Equity Risk Premium
and India’s 10 Year Government Bond Yield which serves as a appropriate proxy for Risk Free Rate. The valuation of the
index is based on the methodology used by Prof. Aswath Damodaran (Dean of Valuation- NYU Stern) and his
pronouncements on the Discounted Cash Flow approach. However, certain aspects of the methodology have been
modified to suit the Indian capital markets and general macroeconomic scenario.
• The Report is prepared using assumptions. Thus, the interpretation of results shall be subjective and based on the user’s
requirements. The report provides a broader idea on whether the Nifty index is “Overvalued”, “Undervalued” or “Fairly”
valued which are derived primarily from the cash flows (Dividends and Buy Backs) in the hands of investors/shareholders.
• The index’s valuation date shall be “31st March, 2023” and all the data used for the purpose of valuation are till 31st
March, 2023.
 Nifty 50 Valuation Report – July 2023

3. Approaches & Methodology

3.1 Free Cash Flow to Equity Holders Historical average yields of Nifty
• Cash flows being one of the key ingredients in DCF valuation
Year Dividend Yield BuyBack Yield Total Yield
implies the extent of the equity holders right on the cash flows.
20 Years 1.36% 0.13% 1.49%
Cash flows implies Free Cash Flows to Equity holders i.e. FCFE.
• However, it becomes a laborious task to derive FCFE of all the 15 Years 1.30% 0.12% 1.42%
companies in the index and hence, a convenient and effective 10 Years 1.29% 0.12% 1.41%
approach has been followed where the Dividend pay-outs and 5 Years 1.29% 0.12% 1.38%
Buybacks are substituted for FCFE. 2023 1.39% 0.13% 1.38%
• The rationale behind the above consideration is that whatever the
cash a firm generates, it shall be ultimately paid to the
shareholders in the long run either on liquidation or after the firm Historical Dividends & Buybacks
has attained maturity in its business verticals either through ₹ 750.00
dividends or buybacks.
₹ 550.00
• The dividend yield has been sourced from NSE Website and since
the buybacks in emerging economies are miniscule, they are not ₹ 350.00
readily available.
• Hence, the Buyback data has been sourced from Prof. Aswath ₹ 150.00
Damodaran’s website which has been consolidated based on the -₹ 50.00
sectoral buybacks conducted.
• As buybacks do not contribute a big chunk of Cash flows, using the
sectoral Buyback yield doesn’t cause a major fluctuations in the Dividend Amount BB Amount
valuation results.
 Nifty 50 Valuation Report – July 2023

3. Approaches & Methodology

3.2 Earning Growth Historical average CAGR Growth of Nifty
• Earnings of Nifty 50 companies are function of Index EPS and
Average EPS CAGR Earnings Growth (%)
Index’s price.
• Earnings are computed using P/E ratio formula where the earnings 3 Years 12.52%
are obtained by dividing Index’s PE Ratio by the price of Nifty i.e. 5 Years 11.31%
Nifty points. 7 Years 10.58%
• The Nifty PE ratio and the corresponding price levels are sourced
10 Years 10.11%
from NSE website and then earnings are derived. The data in NSE
website provides daily data of Nifty prices and PE ratios. Yearly
Average PE range and yearly average Nifty price levels have been
considered for the sake of brevity and convenience. Average Nifty EPS
• EPS CAGR for 3Y, 5Y, 7Y and 10Y were calculated and average of ₹ 1,000.00
those has been considered for the final growth figures. ₹ 800.00
• For computing future cash flows, Average EPS CAGR 3Y has been
considered over 5Y, 7Y and 10y as 3Y provides the best. ₹ 600.00
representation of the current market trends along with factoring ₹ 400.00
the slowdown caused by Covid-19, geopolitical tensions, distressed ₹ 200.00
supply chains and so on.
₹ 0.00
• However, there has been no significant difference in the growth
rates between the above mentioned time frames. The same has
been depicted in the table beside.
 Nifty 50 Valuation Report – July 2023

3. Approaches & Methodology

3.3 Risk Free Rate Historical average 10Y GOI Bond Rate of Nifty
Average Rate 10Y GOI Bond Yield
• The risk-free rate is the guaranteed minimum return that an 20 Years 7.38%
investor can expect for investing in a particular country. 15 Years 7.41%
• For valuation purposes, an economy's 10-year government yield is 7 Years 6.86%
often used as the risk-free rate, but it is more appropriate to 5 Years 6.71%
deduct a country's default spread to factor in sovereign Latest 7.12%
default probabilities.
• India's 10-year government bond yield is used as the risk-free rate,
given the lack of data on default spreads for emerging economies. 10Y GOI Bond Rate
The latest risk-free rate as of March 31, 2023, is used for valuation 14.00%
to provide a forward-looking perspective and to reflect the current 12.00%
economic scenario in India, as the yield has varied significantly 10.00%
from around 7% to 12% in the past. 8.00%
• For emerging economies like India, data on default spreads may
6.00%
not be readily available or may be difficult to obtain. As a result,
4.00%
India's 10-year government bond yield is used as the risk-free rate
for valuation purposes. 2.00%
0.00%
Nifty 50 Valuation Report – July 2023

3. Approaches & Methodology

3.4 Equity Risk Premium Historical average Implied ERP of Nifty

Average Implied ERP ERP
20 Years 2.76%
• the market risk premium for Nifty is the extra return that 15 Years 2.38%
investors demand for investing in a market that is considered to 7 Years 1.91%
be risky, over and above the risk-free rate.
5 Years 1.90%
• It is also a risk that is specific to the Indian market, and it varies
depending on the current market situation. Latest 2.01%
• Investors expect to be compensated for this additional risk in the
form of a higher return on their investments compared to risk- Implied ERP in India
free assets like government bonds.
8.00%
• To estimate the market risk premium, data from the Market 7.00%
Premia website is used for our valuation, which provides 6.00%
estimates of market risk premiums for different regions and 5.00%
countries. 4.00%
• For our valuation purposes, we have considered the latest market 3.00%
risk premium to account for the latest developments in the Indian 2.00%
equity markets. 1.00%
0.00%
Nifty 50 Valuation Report – July 2023

3. Approaches & Methodology

3.5 Time Frame for the Valuation report

• The Valuation date for the purpose of the report shall be 31st March, 2023.
• All the averages for the data such as Risk-Free Rate, Equity Risk Premium, Nifty historical returns, EPS Growth, dividend yield have been
calculated from FY 2000-2001 to FY 2022-23.
• The valuation assessment for Nifty has been made by comparing the derived Nifty value as per our valuation and the closing price of
Nifty as on 31st March, 2023. This comparison helps in evaluating the degree of “Overvaluation”, “Undervaluation” or “Fairly” valued
of the Nifty index based on our valuation model.

3.6 Beta

When valuing an index ,the beta is typically considered to be 1, as the index is regarded as a broad representation of the overall market.
 Nifty 50 Valuation Report – July 2023

4. Valuation
4.1 Original Case Valuation Results

Expected EPS Risk-Free Equity Risk

Total Yield of Cost of Equity Valuation Current Price Result
Growth of Rate Premium

5 Years 3 Years Latest Latest 9.13% 24419.64 19646.05 Undervalued

Valuation of Nifty 50 24419.64

Key Inputs Assumptions
Date 30-Jul-23 30-Jul-23 Undervalued
Current Nifty Level 19646.05 19646.05
Total Yield 5 Years 1.41% The market implied fair value of Nifty is
Expected Growth 3 Years 12.52% 24420.The Nifty is currently trading at
Risk-free Rate Latest 7.12% 19647.A 24.30% appreciation is expected
Equity Risk Premium Latest 2.01% from this level.
Cost of Equity 9.13%

Current Valuation 24419.64

Current Level 19646.05
Trading at Discount/Premium % of
(Discount)/Premium Traded at Discount -24.30%
 Nifty 50 Valuation Report – July 2023

4. Valuation
4.2 Maximum Time Frame Case Valuation Results
Total Yield Expected EPS Risk-Free Equity Risk
Cost of Equity Valuation Current Price Result
of Growth of Rate Premium

20 Years 10 Years 20 Years 20 Years 10.14% 14555.23 19646.05 Overvalued

Valuation of Nifty 50 14555.23

Key Inputs Assumptions
Date 30-Jul-23 30-Jul-23 Overvalued
Current Nifty Level 19646.05 19646.05
Total Yield 20 Years 1.49% The market implied fair value of Nifty is
Expected Growth 10 Years 10.11% 14556.The Nifty is currently trading at
Risk-free Rate 20 Years 7.38% 19647.A 25.91% Correction is expected
Equity Risk Premium 20 Years 2.76% from this level.
Cost of Equity 10.14%

Current Valuation 14555.23

Current Level 19646.05
Trading at Discount/Premium % of
(Discount)/Premium Traded at Premium 25.91%
Nifty 50 Valuation Report – July 2023

5. Sources & Disclaimer

5.1 Sources
• BSE India Website
• Market Risk Premia
• Investing.com
• Prof. Aswath Damodaran website

5.2 Disclaimer

• The Valuations carried out are based out of good amount of assumptions which are built based on the understanding of the current
scenario in Indian Capital markets.
• The report has been prepared solely for educational purpose and not emanating from the professional in practice.
• The author assumes no liability or responsibility for the losses caused by using this report as an investment advice.
• Although, every endeavor has been made to bring this report as accurate as possible, users should not rely on this report for
investment purposes.

5.3 End Note

I would like to express my gratitude to the readers for taking the time to read the report. Your feedback is highly appreciated and
welcome. Please feel free to get in touch at kulshrestharajat1@gmail.com for any Critisim and/or feedback.