Market valuation eroded

For every rupee of earnings managed by BSE Sensex companies, investors are today willing to pay only half of what they paid in January 2008.

The market meltdown of 2008 has seen the Sensex value fall by 35 per cent till date, but it has halved the price-to-earnings multiple (PE multiple) for companies in the bellwether index.

The PE multiple of the Sensex, which was at a rich 28 times (based on historic 12-month earnings) at 21,000 levels, has plunged to a staid 14 times now, Bloomberg data shows. The lower valuation indicates that investors now expect Sensex companies to grow at only half the rate that they factored in, in January.

World over, investors value companies based on potential growth and the PE multiple is one of the widely used tools to evaluate how expensive or cheap stocks are, relative to their growth prospects.
Worst in a decade

The erosion in Sensex PE multiple in this meltdown may be the worst in a decade, even including the dotcom crash of 2001.

Banking and realty companies have been worst hit, with SBI seeing its PE multiple fall from 20 times to just 6, while DLF has seen its PE plunge from 90 times to 8 times.

Reliance Industries, Jaiprakash Associates, SBI, Tata Steel, Reliance Infrastructure (formerly Reliance Energy) and DLF, are among companies that have seen their PE multiples trimmed to half their January level.

Many of these companies have seen their valuation fall even as they managed a sharp ramp-up in their earnings for 2007-08.

DLF (earnings per share grew from Rs 13 to Rs 47 between FY07 and FY08), Bharti Airtel (Rs 21 to Rs 34), HDFC (Rs 69 to Rs 100) are key instances.
‘De-rating’ stocks

While concerns about rising interest rates have prompted investors to tone down growth expectations from bank and realty companies, worries about the economy slowing down have made them ‘de-rate’ infrastructure and capital goods stocks.

Companies in the Sensex basket that have managed to escape this bout of de-rating are Infosys, Satyam, Ranbaxy Labs, Cipla and Hindalco, which have more or less held on to their PE multiples.

via BL