Widely read:
Anand Kumar/AI-Generated Image
Summary: A low P/E stock may look ‘cheap’ at first, but it can also be a trap. Here’s why you shouldn’t fall for a stock’s historical P/E and the three questions you should ask before investing in such businesses.
Let’s say you are an investor who is keen on investing in a large-cap stock. You pull up the numbers on your screener and see that it trades at 55 times earnings today. Its five-year P/E ratio, by contrast, stands at 95 times. And so, it is easy to conclude that the stock today looks cheap. Without thinking twice, you decide to buy it.
This is a trap many investors miss. Called the ‘median P/E trap’, it shows up constantly on Indian stock screeners, particularly because it looks more like discipline than a shortcut.
A stock's historical average (or median) P/E is not a fixed identity, like its ticker or founding year. It records what the market was willing to pay during a specific stretch of time, for a specific growth story and under a specific set of assumptions about the company's future. When those assumptions change, the average itself moves. Comparing today's price only to yesterday's average says nothing about whether today's price is fair. It only says how far the stock has drifted from a number that may itself be out of date.
What a median doesn’t tell you
A median P/E is built from years when growth was accelerating, competition was thin and investors were willing to extrapolate the recent past a long way into the future. Take any of that away, and the price the market is willing to pay changes. This is not a flaw in the calculation. It is the calculation working exactly as it should. A P/E ratio has always been a bet on future growth and how durable that growth is, brought back to today's price. It was never a bet on the past.
The trap is easy to fall into because the logic sounds rigorous. ‘This stock is trading below its own history’ reads like evidence. It is really an assumption wearing the costume of evidence: that whatever justified the old multiple still holds. The only way to check that assumption is to look at what actually changed inside the business, not at what the stock did on a chart.
Three familiar names
Three well-known Indian companies show how fast a ‘normal’ valuation can move. All were once seen as rare, durable compounders and traded at P/E multiples in the high double digits or beyond. They have since settled into a much lower band, even as profits continue to grow.
| Company | Period | P/E ratio | What explained it |
|---|---|---|---|
| Relaxo Footwears | FY19 to FY22 | Around 80 to 100 | Branded footwear seen as a rare, multi-decade compounding story |
| Relaxo Footwears | Current | Around 50 | Growth has slowed sharply; newer brands have entered the category |
| Page Industries | FY18 to FY21 | Around 80 to 120 (peak) | The Jockey franchise seen as unassailable in innerwear |
| Page Industries | Current | Around 50 | Growth has normalised, organised competition has intensified |
| Asian Paints | FY19 to FY22 | Around 80 to 100 (peak) | Distribution moat in paints seen as unbreakable |
| Asian Paints | Current | Around 50 | A well-funded new rival, Birla Opus, broke that assumption |
Why the P/E moved
The reason is visible in growth, not sentiment. In the years that built these high multiples, all three companies compounded sales and built moats to justify paying a premium for scarcity. That growth has since slowed. The competitive landscape has changed too. Newer, well-funded brands entered categories that once had only a handful of serious players, chipping away at pricing power and shelf space alike. Some arrived through e-commerce with lower distribution costs and others through private labels sold directly by large retail chains.
For decades, Asian Paints held a dominant share of India's decorative paints market, built on dealer relationships and distribution reach that looked unbreakable. Through the 2010s, that dominance carried its P/E well above the 30 to 35 range it traded at a decade earlier, and by 2021 to 2022 it had touched three figures. In February 2024, the Aditya Birla Group's Grasim Industries launched Birla Opus, backed by a reported Rs 10,000 crore investment, free tinting machines for dealers and dealer margins far richer than the incumbent offered. Nothing changed about what Asian Paints made or sold on any given day. What changed was the assumption that its distribution moat could not be seriously contested.
None of this shows up in a single P/E number sitting on a screener. It shows up only when growth is placed next to valuation, period by period, which is exactly the step a median P/E comparison skips.
| Company | Annual sales growth, FY15-22 | Annual sales growth, FY23-26 |
|---|---|---|
| Relaxo Footwears | Around 10 per cent | Negative 1 per cent |
| Page Industries | Around 14 per cent | Around 4 per cent |
| Asian Paints | Around 12 per cent | Around 1 per cent |
A better filter
Before treating any historical average as a fair-value anchor, three questions are more useful than the comparison itself.
- Has growth accelerated or decelerated since the old multiple was set? A stock re-rating because growth genuinely improved is a different story from one re-rating on sentiment alone, and that direction can reverse.
- Has the competitive landscape changed? A category that had two or three serious players a decade ago and has 10 today cannot support the same pricing power, whatever the old multiple said.
- Has return on capital held up? A business earning less on every fresh rupee of investment than it used to deserves a lower multiple, not the same one, even while revenue keeps growing.
The bottom line
None of this means high-P/E compounders are bad investments, or that every re-rating is a trap waiting to spring. Some businesses earn a permanently higher multiple because their moat, growth runway, or capital efficiency genuinely improved. The mistake is assuming that without checking.
The safer habit is to treat a stock's own P/E history as one data point, not a verdict. Ask what built that number, and whether the same forces are still at work. A stock trading at half its five-year average P/E is not automatically cheap.
Also read: Can a high P/E stock be cheap?
This article was originally published on August 26, 2026.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
