Notably, despite recent gains, IT large caps and private banks, which have led the Sensex back towards 21,000, are still trading at valuations well below those seen three years ago.
For the analysis, FE collated the valuation measures and earning fundamentals of the top Sensex contributors that have driven the index to a three-year high since the latest market rally begun in December 2011. The Sensex has added 37% over this period.
Most of these stocks also led the market gains between March 2009 and November 2010, the period during which the 30-share index doubled and peaked at 21,004.96. For example, even after a phenomenal surge of close to 60%, the latest price-to-book value (PBV) of ICICI Bank stands at 1.7 against 2.8 in Novermber 2010. Meanwhile, HDFC Bank is trading at a PBV of 4.3 versus 5.1 three years ago.
However, the lower valuations across these banking blue chips are partly justified due to the lower expectation of growth in the economy and, hence, the sector.
Asset quality concerns may also continue to weigh. SBI, the biggest public sector lender, is absent from the latest list of gainers although it was the fifth best performer in the earlier market rally.
Surprisingly, even major IT players TCS, Infosys and Wipro are trading at lower price-to-earnings multiple, despite the recent optimism over a pick-up in fundamentals for the sector. However, the lower valuation may be due to the fact that profit growth in the last one year compared to the year ended December 2010 remains weaker.
Amid a slowdown in its revenue growth, Larsen & Toubro has seen a decline in its position among the top contributors to market gains from the fifth position in 2010 to 10th in the current rally. Despite this, the stock has already surpassed its previous valuations as its current PE multiple stands at 17 against 13.5 earlier.
Meanwhile, major FMCG and pharma players like ITC, HUL and Sun Pharma, which collectively accounted for 1,500 Sensex points in the latest gains, are trading at stretched valuations.