Current PE multiple of Sensex at 21.5 times (it was over 22 times in May 2006).
Lower PE means investors are not paying more than they did then.
Despite 15000 level, earnings growth has mostly outpaced stock price gains.
Cement, pharma stocks see sharp decline in PE; select IT, banking stocks see expansion.
With the BSE Sensex at the 15000-mark, should you be wary of entering the stock markets at this juncture? No more than you were last May. Two-thirds of the Sensex stocks are today available at price-earnings multiples (PE multiples) that are cheaper than their May 2006 levels.
The current price-earnings multiple of the BSE Sensex is at 21.5 times, lower than the multiple of over 22 times in May 2006 (both based on trailing earnings). Though the Sensex has zoomed by 18 per cent from 12600 to 15000 levels, earnings growth has mostly outpaced stock price gains.
The lower PE multiple indicates that investors buying Sensex stocks today are, in effect, not paying more (in relation to the company’s earnings) than they did in May last year.
Sharp declines
Stocks in the cement, pharmaceutical and FMCG sectors are key ones that have seen a sharp decline in their PE multiples between last May and now. Cement companies such as ACC, Grasim and Ambuja Cements suffered a sharp decline in their PEs, despite a scorching pace of earnings growth in 2006-07.
Expectations of an erosion in the pricing power of cement companies following policy intervention contributed to this trend. Pharma stocks Ranbaxy Labs and Dr Reddy’s Laboratories have also seen a decline in their multiples as stock prices have not kept pace with their strong earnings growth.
The same can be said for stocks such as Hindustan Unilever (HUL) and ITC. HUL now trades at 28 times its FY 07 earnings, down from a multiple of 43 times, a year ago. Market players feel that the already rich valuations for these stocks contributed to their recent underperformance.
Auto stocks
Concerns about a possible slowdown in automobile sales after the series of interest rate hikes seem to have impacted automobile stocks, with stocks such as Tata Motors or Bajaj Auto now trading at lower PE multiples.
While stocks from the cement, FMCG and pharma sectors have turned less expensive, select stocks from the IT and banking space have seen an expansion in their PE multiples over this period.
Wipro, ICICI Bank and Satyam Computer are some of the stocks that are trading at higher valuations than last year.