Mumbai: On Friday, as the Bombay Stock Exchange’s benchmark index Sensex breached the 15,000 mark during intra-day trading—it touched 15,007 before closing at 14,964, a new high—experts said the index had actually become less expensive than it was just a few months ago.
That runs contrary to the popular perception that the Indian stock market is overheated and that key indices, such as the Sensex, are overvalued. It also means that the index could rise further.
The price to earnings (P-E) multiple of the Sensex on 5 December 2006 (the price of the share in rupees divided by the earnings per share, also in rupees) when the index first crossed the 14,000 level was 23.06.
At the end of Friday’s trading, the trailing P-E of the Sensex (the sum of the prices of the 30 Sensex stocks against their aggregate earnings per share in 2006-07) was 21.4. In terms of trailing P-E multiple, the valuation of the Sensex, then, has actually declined between January and now.
BARGAIN BUYS (Graphic)
Share prices, however, are a reflection of future earnings, not past ones.
Markets tend to factor in future earnings. Thus, the forward P-E multiple is more important than the trailing one. Even on this measure, the valuation of the Sensex has not gone up despite the index having reached a new high.
According to a report by domestic brokerage Edelweiss Securities, dated 5 January, the Sensex was trading at around 18 times expected earnings per share in 2007-08. Another report from Deutsche Securities, also published in January said that the index was trading at 17 times the expected earnings for 2007-08. And a report issued around the same time by Enam Securities estimated the forward P-E for the Sensex at around 19.
According to analysts, the forward P-E for the Sensex at today’s closing is between 17 and 18. That means its valuation is at the same level it was in January.
At current valuations, the Sensex has the scope to rise by a further 1,500 points in the next 8-10 months, said the head of equity research at a major domestic brokerage, who did not wish to be identified.
“The Sensex could add another 10-12% in next eight months. Currently, it is trading at 18 times FY08 earnings and 16.7 times FY09 earnings. The economy continues to do well and inflation will be under control in the future. This, added with strong corporate growth, gives a strong outlook for the Sensex in the future,” he added.
On Friday, the government announced that wholesale inflation for the week ended 23 June was 4.13%, well off its peak reached earlier in the year.
Sandesh Kirkire, the CEO of Kotak Mahindra Asset Management Co. Ltd, said that investors were confident because the predictability (of earnings) for Sensex stocks had gone up. “At current levels, the valuations are not high,” he added.
However, this could also be because 17 Sensex constituents are trading at levels lower than they were when the index hit 14,000.
Still, in terms of trailing P-E multiples, the Sensex is valued lower than China’s index, the Shanghai SE Composite IX, which is currently trading at 38 times earnings, and Japan’s Topix Index (Tokyo), at 31.6 times earnings.
However, many emerging market indices in the Asia-Pacific region, such as Singapore, Taiwan, Pakistan, Malaysia and the Philippines are trading at lower P-E multiples than the Sensex.
The benchmark indices of developed markets in the Asia Pacific region, such as Australia and Hong Kong, trade at 17.4 times and 17 times trailing earnings, respectively.
All the major indices in Europe are trading below 16.5 times trailing earnings, and American indices, such as the S&P 500 and the Dow Jones Industrial Average, are trading at about 18 times trailing earnings.