Average P/E ratio drops below 10

Sensex P/E, which hovered around 16-17 before elections, has declined to 13.04 now.

The price to earnings (P/E) ratio, an indicator of market valuations, has fallen to a single digit, to 9.75, in the last 10 trading days of the current month. Just six months ago, the P/E ratio was hovering around 15. What this chiefly implies is that investors are willing to pay much less for equity now.

In simple terms, an investor who was willing to pay Rs 15 for a stock for a rupee earned per share six months ago, is willing to pay only Rs 9.75 for the same stock now. This happened immediately after the defeat of the National Democratic Alliance government in the general elections.

The new government's statement that it was against the blanket sale of public sector undertakings (PSUs) and that no profitable PSUs would be sold quickly, knocked out the premium valuations built into PSU stock prices.

The stockmarket has seen quite some selling in recent weeks. The wave of selling hit almost all groups of stocks, including index and A group stocks. The Sensex P/E, which hovered around 16-17 before election dates were announced, has declined to 13.04 now.

In the same period, the P/E of A group stocks declined from 12.72 to 10.26, of B1 stocks from 8.40 to 6.46 and of B2 stocks, from 8.90 to 5.50.

The downturn in commodity prices, too, saw P/E ratios of shares of companies in the non-ferrous metals, aluminium and steel industries, fall to below 10 in the last four months.

Stockmarket participants still appear unclear about the pace and direction of government policy, despite the release of the new United Progressive Alliance government's common minimum programme and reassurances of continued reforms.

Foreign institutional investors were net sellers in May. They restricted their buying and selling activities on the Indian bourses considerably in June.

Analysts say the markets are concerned about the government's ability to control the fiscal deficit and meet its stated investment plans, owing to the perceived risk of a slowdown in privatisation proceeds.

Expectation of a global hardening of interest rates and fears of weaker capital flows, suggest an upward bias to Indian interest rates, which can negatively impact the equities market, market analysts say.