Market racing far ahead of India Inc's earnings

Average P/E ratio on BSE is 16.65 - up from 13.24 a year ago.

The stock market is currently trading at a price-to-earnings multiple (P/E) of 16.65 times to its trailing twelve-month (TTM) earnings ended December 2005. A year back, the stock market was valued at 13.24 times of its TTM earnings ended December 2004.

The average P/E is arrived at by dividing the collective market capitalisation of the companies studied by the Business Standard Research Bureau with the total net profit earned by them in the trailing 12 months ended December 2005.

The study has covered as many as 1,613 companies belonging to the manufacturing and the services sectors. However, it has not taken into account the firms that announced net losses in December 2005.

While the net profit of the corporate sector for the trailing 12 months ended December 2005 rose 21.56 per cent, the market value of traded stocks shot up by almost 50 per cent.

The P/E ratio for the BSE Sensex stocks is moving ahead of the market with the 30-scrip Sensex currently trading at a P/E of 18.42.

A year ago, Sensex stocks were valued at 15.61 times. S&P CNX Nifty also witnessed a rise in valuation with the P/E moving up from 14.05 times a year ago to the current level P/E of 16.80.

In contrast, Hong Kong Hangseng's P/E is around 14, FTSE-100's is 14.8, Dow Jones Industrial's 18.2, Japan's Nikkei-225's 36, Korea Kospi's 11 and Thailand Bangkok SET's 9.5.

The rise in market value of the Indian shares by more than double of India Inc's earnings growth rate has been attributed to the relentless buying by foreign institutional investors (FIIs).

The local mutual funds have also chipped in, having mobilised huge money through the launching of new equity schemes.

The P/E ratio of BSE-500 stocks too rose substantially, to 16.93 times, during the same period from a year-ago level of 13.36 times. The P/E average, however, declined below 15, if the Sensex stocks were excluded from the sample taken for this study.

The ex-Sensex stocks were currently trading at a P/E of 14.98 compared with a year-ago level of 11.27 times.

The BSE A-group stocks are trading at a P/E of 16.47 times, higher than a year-ago level of 13.40 times. The B1-group shares are trading at a P/E of 15.52 against 12.77 times a year earlier.

Of the 98 sectors tracked by the Business Standard Research Bureau, the P/E trend showed that only 14 sectors were currently trading at a P/E below 10 vis-à-vis a year-ago level of 26.

The P/E of as many as 46 sectors is moving between 10.1 and 19.99, and for 38 sectors, it is hovering over 20 times. A year ago, 56 sectors were trading at a P/E of between 10.1 and 19.99, while 16 other sectors were trading at a P/E of over 20 times.

Integrated steel manufacturers command the lowest P/E among the 98 sectors. The P/E of steel companies declined to 4.49 from a year-ago level of 5.72 times.

The stocks traded under the retail sector command high premium in the market. Three stocks "" Pantaloon Retail, Trent and Zodiac Clothing "" are currently trading at a P/E of 71.68 against a year-ago level of 53.09 times.