Valuations see marginal rise

Sensex @ 18,000

Sep-19Sep-27Oct-09 Trading109.26137.87189.81 Engineering37.7939.8643.21 Telecom33.3736.1438.80 Sensex22.9924.1725.92 Power20.9622.1125.17 IT23.5024.1125.01 Pharma19.8319.7019.82 Refineries15.4116.8318.50 Banks17.2318.2218.18 Metals14.0215.3115.55 Steel11.0912.1112.48  If corporate India could achieve the earnings growth of 20 per cent in 2007-08 and 2008-09, the P/E at the current valuations comes down to around 15 times.  In 1993-94, when foreign institutional investors (FIIs) were allowed to invest in Indian equities, the P/E valuation had risen to a historic high of over 30 times. However, long-term recession set in after the second half of 1995-96 and market valuations of stocks plummeted below 10 times by 2002-03.  The BSE Sensex has crossed historical averages on all parameters and the Sensex now trades at a P/E of over 25 times based on the earnings for the trailing twelve months ended June 2007.  The Sensex, according to Motilal Oswal, is trading at a P/E of over 21 times on the forward earnings for the financial year ending March 2008. The 15-year average P/E for the Sensex is 18.3 times.  According to Motilal Oswal, the valuations are higher than the historical averages and are driven by the current trillion-dollar GDP, strong government finances, surplus liquidity and easing of interest rates.  However, some risks that the liquidity-driven rally is ignoring are slower momentum in earnings, valuations at the higher end of the averages and a fragile political scenario.  The current P/E valuations of all profit-making companies look pretty well largely because of lower P/E valuations for stocks of public sector undertakings (PSUs).  The P/E valuation of the PSUs is currently averaged around 14.5 times, while the P/E of private sector companies is around 24.6 times.  It means the P/E valuation of Indian companies does look stretched largely because of poor market valuation for PSU companies.  The Sensex P/E of 25.92, based on the net earnings for the trailing twelve months ended June 2007, will go up to 27 if one excludes PSU companies from the valuation.  Meanwhile, the 2,000-point gain in the Sensex has been overwhelmingly contributed by the Reliance group stocks.  The sectors that have not participated in the current rally are banks, IT, steel, pharmaceuticals, personal care, cement and many others.