Valuations get realistic as market P/E falls to 15

Study based on stocks that account for 85% of traded scrips' m-cap.

The price to earnings (P/E) multiple of the market, which soared to an unsustainable level of over 22 when the Sensex hit its all-time high of 12,671 on May 10, has come down to 15 now, with the benchmark index hovering around 9500 levels.

The study is based on 1,340 stocks that account for 85 per cent of the market capitalisation of traded scrips. "With P/E coming down to around 15, valuations of Indian companies have come back to a realistic level. The financial performance of India Inc for the April-June quarter will hold the key to the future of the Sensex," said an analyst.

The current P/E multiple has been compiled by taking into account the net profits of these 1,340 companies for the trailing 12 months (TTM) ended March 2006 and the market capitalisation on June 14.

The P/E of the market on May 10 was arrived at by taking into account profits for the trailing 12 months ended December 2005, as the net profits of all companies were not available at that point of time.

With the decline in prices and a modest 2.65 per cent growth in TTM earnings, the P/E of Sensex stocks declined to around 18 (excluding ONGC) from 23.50 on March 31, when the index was at 11,279.

The P/E of A group stocks has fallen to 15.4 from 20.9 with TTM earnings showing a marginal growth of 3.58 per cent.

The stocks of B1 group, B group and S group reacted sharply to the market meltdown with the P/E of these groups plunging more than 33 per cent each.

The P/E of B1 stocks at 13.4 (20.2), the P/E of B group at 9.57 (14.3) and the P/E of S group 15.5 (22.6) have declined sharply with the overall market meltdown. The TTM earnings growth for each of these groups has been modest at around 5-10 per cent.

Overall, stock prices have reacted sharply, each plummeting over 30-35 per cent from their peak levels recorded on May 10. The Sensex stocks have moved down by around 30 per cent, on an average, while stocks of other categories have tumbled 30-35 per cent from their peak levels.

The market had been hovering in an overbought zone for quite sometime, and open interest in futures and options soared more than Rs 50,000 crore in the April-May period. The daily cash market turnover, too, grew beyond the Rs 20,000 crore mark on April 27.

However, with a slowdown in corporate earnings during the quarter ended March 2006, stock prices seemed to have started reacting to it.

The growth in the net profits of 1,272 profit-making companies for the TTM ended March 2006 was modest at around 4 per cent over the TTM net profit for the December 2005.