Sensex valuations trend lower while index peaks

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SummaryAlthough BSE Sensex closed at an all-time high, market valuations have trended lower during period.

Although the BSE Sensex closed at an all-time high today on Wednesday, surpassing its November 2010 peaks, market valuations have trended lower during the period over which the markets have moved back to these levels. A look at the price-to-earnings (PE) multiple of the 30-share BSE Sensex shows that the index is currently trading at lower PE multiple compared to three years ago.

As per Bloomberg, the one-year forward PE ratio of the BSE Sensex currently stands at 15.8 compared to 20 on November 5, 2010, when the market closed at these levels. Notably, the earnings growth of Sensex companies has come down from 26% in fiscal 2010-11 to about 5% in FY13. Analysts have pegged the FY14 earnings growth in the range of 7% to 10%.

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Not surprisingly, a number of bluechip stocks leading the latest market rally continue to trade at cheaper valuations compared to November 2010.

Despite recent gains, IT large caps and private banks, which have led the BSE Sensex back towards the 21,000, are still trading at valuations well below those seen three years ago. For example, even after a phenomenal surge of about 68% the latest price-to-book value (PBV) of ICICI Bank stands at 1.8 compared to 2.8 in November 2010. Meantime, its peer, HDFC Bank, is trading at a PBV of 4.4 vs 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 banking sector. Asset quality concerns may also continue to weigh on valuations.

Surprisingly, even major IT players TCS, Infosys and Wipro are trading at lower PE 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.

Meanwhile, major FMCG and pharma players like ITC, HUL and Sun Pharma, which collectively accounted for more than 1,500 Sensex points in

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