Large cap, mid cap, small cap valuations – how are they placed?

In today’s article I have created a chart that contains the price to earnings (P/E) ratios for large cap, mid cap, small cap valuations. I have used the BSE 30 Sensex, BSE Midcap and BSE Smallcap indices respectively.

In a past article on mid cap and small cap valuations, one could see that mid and small cap valuations had gone way higher than average levels. In fact, they had overtaken large cap valuations which is quite remarkable. I had spoken of the caution needed in mid cap  and small cap stocks.

Why bother?

Of course, if you have studied individual stocks well enough and invested with a margin of safety you are guarded. Still, I like to look at aggregate values and also see whether there is sanity in the market at an overall level.


Interactive chart for Sensex, BSE Midcap and BSE Smallcap price to earning ratios

Here is the updated chart as of 8 March 2013. The correction in valuations for the mid cap and small cap indices has finally played out.

made with ChartBoot

You might not see the chart properly if you have blocked Javascript or if you are on Internet Explorer. This chart should show properly on Chrome or Firefox.

For those who are may have trouble seeing the interactive chart, here is a static chart.

Large cap, mid cap and small cap valuations (sensex, bse midcap and bse smallcap) - 8 Mar 2013

Large cap, mid cap and small cap valuation – a historical perspective

It’s useful to compare current P/E ratios with average levels seen over the past 7 odd years. The range is fair as it covers one down cycle and up cycle. Though, I should say that this up cycle was furious because of central bank interventions all over the world and by the RBI too.

IndexAverageAs on 8 March 2013
BSE Sensex19.517.7
BSE Midcap18.018.6
BSE Smallcap15.020.3

Data range – 20 Mar 2006

Why, this date you may ask? The BSE gives P/E data for BSE Smallcap and BSE Midcap from 20 Mar 2006 onwards.

There is still froth in small-caps at an aggregate index level. Take care! On the other hand the large cap index is below long-term average levels.
If you enjoyed reading this article and found the interactive chart useful, do share it with friends!

Join the Start Stock Investing E-Course. It's free.

15 lessons over 15 weeks. Over 500 people who have already signed up. Start off. Learn how to invest in stocks for the long-term.


  1. Anil Kumar Tulsiram says

    Good one Kunal

    What you are talking is quite similar to what I recently read in one of the books about John Templeton. The book says initially [they are not sure whether during later part of his career he continued to employ this method], Templeton used what he call Yale method, in which he used to see valuation of market on current earning basis [though for his stock he prefer 5yrs forward earnings] and use to adj. cash in his client portfolio depending upon current market level. If market are below 30-40% below normal fully invested and if they are normal level only 60% invested and so on.

  2. Aditya says

    Shouldn’t you be using median PE as opposed to average? After all, what is required is to look at the PE an investor could obtain on any given day; the problem with average is that one day with outlier PE could distort the whole value. I suspect that is why you have 19.5 PE for sensex; my own median of BSE historical data shows 18.6

    Also, it’s important to mention to readers that as earnings increase, you should buy into the index if PE is favourable. Too many investors stay away because the price is at a lifetime high, without realizing that earnings could be too!

    • says

      Aditya, I will have to see whether there are P/Es which are significant outliers in yearly data. Conceputally, if there are wide swings, yes, median value is better.

      With either method, one gets a broad sense of where the market is at a point in time and how it looks as compared to the past. I will look at making the chart with median data as an exercise. Thanks for the suggestion.

      Agree with you on the second point that one must not look at P/E in isolation without looking at earnings growth.

  3. Aditya says

    Thanks for responding to my comment, appreciated.

    You know, with a truly long-term horizon the concerns about multiples go away. For example, I was looking through the history. If I had followed a simple rule of entering at PE 22, I would have made profits but also missed a great bull-run between 2003 to 2008. I don’t have data for 1988 to 1992, but I imagine it would be the same case.

    What I observe of the market is that it sustains high PEs for a long-time, and sometimes earnings growth surprises everybody. Then when we hit a bear phase, sure, some value is lost, but you always get back about 90% of the bull high. So the previous bull run in 2008 went up to 21k; we have seen 21k again in 2011.

    I begin to believe more and more what Burton Malkiel and Warren Buffet say: don’t exit unless you need to, especially if you have big horizons like 20, 30 years.

    • Aditya says

      Sorry, that typed out wrong. *If I had followed a simple rule of entering at PE of 16 and exiting at PE of 22.*

      • says

        Ok. Entering at P/E of 16 and exiting at P/E of 22 solves my confusion. I was thinking over your previous comment because I read it first.

        Do you invest in Index ETFs like Goldman Bees in reality?

        I look at this more to see where the market is and whether certain classes of stocks (midcaps and small caps) look overvalued. Though one could do index investing based on rules like you suggest, if one does not have the time to study individual stocks.

        • Aditya says

          Yep, I invest in NIFTY Bees & Junior Bees. The rationale is that the expense ratio can only go down from here. Combined with a discount broker so entry commission of 0.1%, I don’t think any set of MFs I pick can beat the index for 20-25 years straight. That’s my horizon: 20 years to 25 years. This is especially because I believe India’s growth story is still very much in its infancy. I could invest in individual stocks but I don’t have the time. I also have a value investment portfolio where I follow a basic screen and buy a portfolio of stocks. While the performance of value portfolio remains to be seen, Nifty Bees has been decent so far.

          • says

            Ok. It is interesting. Vanguard talks of the merits of index investing. You are doing the same with this strategy. Have you back-tested this idea in Indian market and compared it to a good MF? I would be glad to understand from you.

  4. Anil Kumar Tulsiram says

    Regarding discussion on investing in passive index fund/ETF, came across an interesting insight from Mohammed El Erian, PIMCO. Here the extract “Lastly, someone asked him a Vanguard-related passive indexing question. Mohammed tells a killer anecdote from early in his career about how EM bond indexes were once made up of 22% Argentinian bonds pre-default, and that the other managers who were hugging that index got hammered. He says that passive makes sense only if you’ll be driving in reverse up a road that is completely straight. Because you’re essentially looking at snapshot of the way things were. “There are tines when a simple passive approach is going to get you into trouble.”

    I fully understand that passive fund might be of value to people who do not have time to manage their investment. Just presenting an alternative view.

    • Aditya says

      @Kunal Yes I have backtested to the point that data is available. The returns are uncertain and unattractive over 5 or even 10 year horizons, but begin to beat mutual funds silly over 15 to 20 years.

      @Anil All due respect to PIMCO but all asset managers have a vested interest in active investing. They get paid a cool 1.5% to 2% per annum to do so, whether they fail or succeed! I have looked at the mutual funds my family invested in over a 20 year horizon… terrible. They ate up so much of the gains. Over the long-term that extra 1.5% really takes a bite out of your portfolio. The worst part is, the return of the mutual funds over 20 years does not match that of sensex. So it’s a double whammy.

      Why go for simple passive approach? Go for diversified passive approach. Who is telling us to invest purely in EM Bond index? Nobody. In fact, EM assets should be a lesser part of one’s portfolio.

      • Aditya says


        I do agree with Anil that people who have the time and expertise to manage their investments actively might do better. However, it’s important to be aware of the opportunity cost of time as well as the limitations of expertise. Personally I don’t enjoy poring over financial statements and figuring out whether a business model is robust. Plus, when you’re trusting your own expertise, your asset allocation might become naturally more conservative. I might put 45% of my savings into diversified equity index funds; but I would not put 45% of my savings into my stock picks, however confident I may be. I feel confident in saying that with the exception of gifted people who like managing investments actively, most people are better off with a more passive approach.

        • says

          @Aditya, @Anil – I guess it is to each his own. It also depends on a lot on,

          1. inclination to study up on stocks.
          2. time available to do so.

          There might be people who will tick 1. but don’t have time. And then there are those who won’t tick either. Approaches will change accordingly.

          • Aditya says

            I agree with you. To that, I would add, it is to each his own if one is aware of the data. A lot of Relationship Managers I meet look almost offended when I state that the sensex gives 19% return for 25 years (when you include dividend). Net of fees, the total return works to 17%. I ask them (quite politely) to provide me a statistic that the top decile of fund managers has that kind of record. And they explain that funds don’t operate that long; that it is up to me to move my money around; that the Indian market is young and so on. Well, even in the US market, the upper 25% of funds don’t beat the index (once fees are deducted from both). And what’s worse, there is no likelihood that past winners go on to win. Check this out

            Now it could be that the Indian market is different due to inside information & corruption, but I retain my skepticism. Moreover, my question to active investors is, even if you are achieving alpha – say a good 5% or 10% more than 17%, then are you truly making that money over the entire horizon of your equity investing life (which could be 25-40 years) and are you allocating as much as your age allows (which would be 40-50% equity for most people until the age of 45). The vast majority of active investors I’ve met say no! If the answer is no, then through sheer impact of portfolio weighting, you will do better passive. Anyway, just my opinions. I’m passionate about it because I’ve seen loads of people miss out. I am sure you guys don’t need my soapbox preaching – that’s just a way for a young guy like me to hear your counterarguments and learn from you. Am sure readers will learn from a debate like this.

          • says

            Well written!

            If you are not allocating as much, then yes, you might get percentage returns but absolute returns will be less.

            I like listening to counterviews. At least you get a balanced picture that way.

  5. Aditya says

    Yep, I enjoyed this discussion. Would love to read a post by you which details your thoughts on the pros & cons between passive & active investing, and perhaps includes the views of your other readers. You guys are way ahead of me in years of experience (I’m 26) and a lot of young investors face this pivotal choice of emphasis in style.

    • says

      No one is ahead / behind. All of us keep learning :)

      I will put my thoughts down in an article. I will try to get the right data first. That might be interesting than talking in general terms.

      Thanks for the suggestion Aditya. Hope to interact with you more and more at Capital Orbit.

  6. Mit says

    Not sure if PE is the right metric for small-cap valuation since small cap earnings reduce dramatically in a bad economy artificially increasing the PE multiple. P/B might be a better ratio.

    • says

      Yes, P/B has its merits. My thinking behind this chart was to get a feel of the market. I will not stop from investing in an undervalued stock in an overvalued aggregate market. Maybe position size will need to be modified or I might average in over some time.

  7. says

    There are two mid cap indices, namely BSE mid cap and BSE mid cap select index. Similarly there are two small cap indices, namely BSE small cap and BSE small cap select index. There is wide difference in PE ratio of the two indices. Which index you have used in your analysis. Which is the standard index and should be used to know valuation of mid and small cap stocks.
    SK Sharma

  8. says

    Where from did you get P/E data for BSE Smallcap and BSE Midcap index. You have given data from 20 Mar 2006. On BSE website BSE Smallcap and BSE Midcap index data is available form 01 April 2015 onwards, not before that.

    Based on PE ratio of 8 March 2013, you have recommended to remain cautious in midcap and small cap space and remain away from this segment, siting high valuation. From 8 March 2013 to August 2017, BSE Smallcap and BSE Midcap index have risen more than 3 times. If someone has acted on your advise, he would have missed a big rally in Smallcap and BSE Midcap space and would have missed a great opportunity to make money. clearly PE based valuation logic is not working. Then what is the use of your logic and argument. Pl. clarify.
    SK Sharma

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>