Price-earnings ratio down to 9.66 against 11.35 a year ago
The price to earnings (P/E) ratio of actively traded stocks today stands at 9.66 compared to 11.36 an year ago.
This indicates that the market has not fully recovered in relation to the profits earned by the corporate sector during the trailing twelve months ended March 2003.
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Though, the market indices have soared to a 14-month high, gaining over 19 per cent and the market capitalisation has soared a whopping Rs 1,50,000 crore since April 25, 2003, the low P/E ratio shows the markets have not fully discounted the net profits in the trailing 12-months.
This implies there is enough scope for a further appreciation in stock prices when the markets fully factor in the earnings per share in the trailing 12 months.
During the trailing twelve months ended March 2003, the net profits of the corporate sector increased by over 45 per cent while the BSE Sensex appreciated 7.21 per cent.
The S & P CNX Nifty by a marginal 2.82 per cent gain. But the market capitalisation of all traded stocks moved up only 5.71 per cent in the last one year.
The current low P/E valuations prevailed across the board, not even sparing Sensex and Nifty stocks.
While the trailing 12-month net profits of Sensex and Nifty stocks increased 20 per cent, the Sensex P/E slipped from 14.29 an year ago to 12.58 as on June 20 and Nifty P/E was down from 13.88 to 11.92, over the same period.
If one excludes Nifty and Sensex stocks from this study, the P/E of all other stocks declined from 7.58 to 6.73 in the last one year.
This study covers 760 stocks for which data on net profits in the trailing 12-months is available with the BS Research Bureau, but excluding all non-profit making companies.
The study shows both stocks traded above or below the average P/E ratio for the full sample are now traded below their P/E ratio an year back.
The P/E of 226 stocks traded above the average P/E of 9.66 declined from 17.5 an year ago to 15.7 while the P/E of 534 stocks traded below the average declined from 6.22 to 5.44.
Sixty sectors are trading below their P/E an year ago while 45 sectors are trading above the P/E an year ago.
All the major sectors, including information technology, banks, fast moving consumer goods, pharmaceuticals, 2/3 wheelers, refineries, petrochemicals, entertainment, steel, tyres are now trading below their P/Es an year ago.
However, the P/E has improved marginally for sectors such as aluminium, cigarettes, cement, telecommunication, food products, engines, and electricals.