Sunday, March 19, 2006

Are Indian market valuations hitting upper limits ? A historical perspective.

Indian markets have been on a roll since mid-2003, yielding a return of 250 per cent . India as a stock (in mid-2003) was trading more like a "cigar butt" (as Charlie Munger would've called a deep-value stock). The Nifty index was then trading at a p/e of 12.5 times and a price-to-book ratio of 2.5 times. Dividend yield too was at around 3%. These were levels not seen in many years. That period was the best for making investments in good companies with robust business models. The list would include auto companies, capital goods, PSUs (including banks), etc. Followers of Benjamin Graham are always in the look for such periods of stock market history.

But, after a 250 per cent accent, how do markets look today ? Where do the key valuation parameters (p/e, p/b and div. yield) stand today and what to they indicate ? The following charts tell the story -


Of the three indicators, two (p/b and yield) clearly indicate stretched valuations. However, at 19 times p/e ratio remains modest, by historical standards. But, a further rise in stock prices will have to be supported by an earnings growth of 20% +. Will corporate India record such a growth ? If yes, then one needs to look for sectors that will lead this growth. Does anyone have a view on this ?

PS: The lines drawn in the last three charts represent six year average for the valuation ratios. For the p/e ratio it is 17 times, average for p/b and dividend yield is 3.3 times and 1.7%, respectively.

1 comment:

Pravin said...

The sensex P/E is 17 -this might be a deceptive thought.
Check out Hindu's analysis of the index P/E.