BSE P/B ratio doubles in 8 months

SMOKE SIGNALS

The price-to-book (P/B) ratio of the shares trading on the Bombay Stock Exchange (BSE) has doubled in the last eight months, from 1.41 times on April 25 to 2.89 times today.

Meanwhile, the P/B ratio of the 30 share Sensex moved up 62 per cent from 1.99 times to 3.23 times in the same period.

The doubling of P/B ratios indicates an overbought position in the stock markets, as in simple terms it implies that price per share has moved much faster than the book value per share.

This study of 639 stocks, accounting for 80 per cent of the BSE's market capitalisation shows the P/B ratios of 70 per cent of the sample stocks doubled during the period.

The P/B ratio of the remaining 20 per cent of the stocks increased between 50 and 100 per cent.

The sectoral trend shows the P/B ratios of 76 per cent of the 111 sectors tracked by the Business Standard Research Bureau doubled while the P/B ratios of another 15 per cent of the sectors moved up between 50 and 100 per cent in the same period.

The rise in the ratio has been backed by strong performance of the corporates during the past three quarters in a row. Net profit during the first half of the current year went up over 50 per cent.

Corporate India saw a major turnaround in steel sector and a 100 per cent profit growth in shipping, capital goods and chemical sectors.

Indian stocks were going cheap eight months ago with shares of as many as 70 sectors available at a P/B ratio of below one (meaning that these were quoting at less than their book value).

Things improved dramatically thereafter and shares of only 22 sectors are now available at a P/B ratio of below one.

Of the 639 stocks studied here, as many as 448 stocks are traded at a P/B of less than one eight months ago. Now 212 stocks are traded below P/B of below one.

Sectors which were quoting a P/B ratio of less than one eight months ago are the biggest gainers. Engineering, textiles- readymade apparel, textile machinery, steel, shipping, automobile tractors, bearings, paper, fertilisers, tyres and entertainment sectors were major P/B ratio gainers.

A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company.