Key industries? P/E ratio plummets; blame poor corporate data, recession

Market volatility, coupled with the global meltdown, has been hitting India Inc in different ways. And now it?s the turn of price-earnings ratio (P/E ratio), which is showing a downward trend.

A study carried out by fe shows most industries have come up with lower P/E ratios as on February 20, 2009 compared to February 20, last year. Of the 35 major industries studied, fourteen exceed India Inc?s average P/E. The average P/E ratio of 2,473 companies has decreased from 27.20 times to 12.17 times during the period.

Even as P/Es of most of companies decreased over the past year, the Sensex P/E dipped as well. The 30-share BSE Sensex was trading at a P/E of 12.44 times as on February 20, compared to 22.01 times on February 20, 2008. Perhaps, this was due to the poor corporate data and global financial crisis.

An analyst from a rating agency said, ?The fall in sensex started by concerns of rising inflation, followed by the sub-prime crisis, FII outflow, liquidity crunch, dismal IIP numbers, weak global cues and slowdown in trade. The fall has been continuous despite a series of measures by the central government, RBI and Sebi.?

The P/E normally gives an idea of how expensive a stock is. It is equal to a stock?s market capitalisation divided by its earnings (after tax) over a period of 12 months, usually the trailing period, but occasionally the current or forward period. Higher the P/E ratio, the more the market is willing to pay for each rupee of annual earnings. Industries with high P/E ratios are more likely to be considered ?risky?.

Among the 35 major industries, construction, trading, electric equipment, engineering, electronics, media and retailing showed significant decrease in their P/E ratio as on February 20, 2009, compared to February 20, last year.

The average P/E ratio of 87 construction companies showed a decline from 33.80 times to 7.83 times during the period. The M-Cap of the 87 construction companies? decreased 79.3% to Rs 84,660 crore on February 20, 2009 from Rs 4.09 lakh crore on February 20, 2008. And the trailing four quarters? net profit of these companies also decreased 10.7% during the same period.

In the case of banking industry, the average P/E ratio of 39 banks decreased from 18.64 times to 6.33 times. The total market cap of this industry group decreased 57.3% to Rs 2.53 lakh crore from Rs 5.92 lakh crore during the study period. And the net profit of the 39 banks in the four trailing quarters increased 25.7% to Rs 39,948 crore during last four quarters.

Of the 35 industries, six industries?oil&gas, pharmaceuticals, textiles, entertainments, sugar and jems&jewellery industries showed increase in P/E ratio during the past one year.

The top five industries, according to their P/E ratio on Feb 20, 2009 are textiles, trading, retailing, entertainments and jems&jewellery. Interestingly, on February 20, 2008, the top five industries were retailing, trading, entertainments, media and engineering.

On the other hand, lowest P/E was observed by shipping, paper, aluminium, steel and fertilizer industries on February 20 this year. The M-Cap of 14 shipping companies? decreased 69.8% to Rs 10,501 crore on from Rs 34,819 crore during the period. And net profit of 14 shipping companies in the four trailing quarters increased 2.3% to Rs 3,171 crore during last four quarters.