PE Ratio - Good Or Bad
PE Ratio Is No More A Criterion For Investment
Times Of India - Srikala Bhashyam
Analysts often say that the BSE sensex at a PE (price-earnings) ratio of over 20 is expensive. But investors today seem to be paying little attention to the PEs of some stocks. The BSE index now has stocks trading at PEs of over 50 and some have even hit the century mark!
According to market analysts, the investors' willingness to pay a huge premium for a few stocks is driven by their future performance potential as reflected in their order books. "Companies like ABB, BHEL have turned expensive because of their huge orders on hand which run into thousands of crores of rupees. These companies have been growing their bottomline by over 20-25% and earnings growth has been around 40-50%. Investors are willing to pay a premium for these stocks," says Sheshadri Bharathan, country head (broking), Dawnay Day. Often, investors are seen to be chasing a sector more than a company. Pantaloon Retail is one example of this frenzy which has pushed the stock price to over Rs 2,000.
The company has managed to take its revenue from Rs. 285 Cr. in 2001-02 to Rs. 1960 Cr. in 2005-06, and the PE ratio has kept pace with this revenue growth.
According to VR Srinivasan, director & chief executive officer of Brics Securities, sectors like retail are unchartered territory for Indian investors. "You buy stocks for the future. These are structural plays, more than valuation plays," he says. But market sources admit that often the prices of some stocks run up because of institutional buying.
Foreign funds buy stocks which have a huge liquidity and a long term story. Though the retail investor doesn't have the same long term appetite, he ends up picking those stocks, says an official at a broking house. Similar "long term" stories had pushed tech and telecom stocks to dizzy heights in early 2000.
But not only did the growth rates drop significantly, but many firms even disappeared from the trading list. Investors would be better off if they kept an eye on the management of the firm besides the sector as history has often shown that when market crash, it is retail investor who pays a price.
Analysts often say that the BSE sensex at a PE (price-earnings) ratio of over 20 is expensive. But investors today seem to be paying little attention to the PEs of some stocks. The BSE index now has stocks trading at PEs of over 50 and some have even hit the century mark!
According to market analysts, the investors' willingness to pay a huge premium for a few stocks is driven by their future performance potential as reflected in their order books. "Companies like ABB, BHEL have turned expensive because of their huge orders on hand which run into thousands of crores of rupees. These companies have been growing their bottomline by over 20-25% and earnings growth has been around 40-50%. Investors are willing to pay a premium for these stocks," says Sheshadri Bharathan, country head (broking), Dawnay Day. Often, investors are seen to be chasing a sector more than a company. Pantaloon Retail is one example of this frenzy which has pushed the stock price to over Rs 2,000.
The company has managed to take its revenue from Rs. 285 Cr. in 2001-02 to Rs. 1960 Cr. in 2005-06, and the PE ratio has kept pace with this revenue growth.
According to VR Srinivasan, director & chief executive officer of Brics Securities, sectors like retail are unchartered territory for Indian investors. "You buy stocks for the future. These are structural plays, more than valuation plays," he says. But market sources admit that often the prices of some stocks run up because of institutional buying.
Foreign funds buy stocks which have a huge liquidity and a long term story. Though the retail investor doesn't have the same long term appetite, he ends up picking those stocks, says an official at a broking house. Similar "long term" stories had pushed tech and telecom stocks to dizzy heights in early 2000.
But not only did the growth rates drop significantly, but many firms even disappeared from the trading list. Investors would be better off if they kept an eye on the management of the firm besides the sector as history has often shown that when market crash, it is retail investor who pays a price.
posted by Raj @ 3:17 PM
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