PE ratios of 2,630 cos plummet by a third

Written by Pradip Kumar Dey | Mumbai, Nov 11 | Updated: Nov 12 2008, 06:27am hrs
With the markets taking a beating, it is obvious that the price to earnings ratio would fall. When compared to the previous year, the PE ratio of 2,630 companies has fallen by a third. From 33.31 times in November 11, 2007, the PE ratio now stands at 11.90 times. Even for the Sensex, the ratio is now at 12.33 times its trailing earnings, from 24.27 times as seen on the same day of the previous year.

Such a colossal fall in the PE ratio is unprecedented, say analysts. So is the overall fall in the markets.

However, in this fall, there have been some sectors that continue to remain the favourites. A PE ratio, which compares the price with the earnings of the company, has various interpretations. One of them is the attractiveness or the premium paid by investors for the sector or the company.

Out of 35 major industries studied, sixteen exceed India Incs average PE ratio. The telecom, power and the oil and gas sector remain at a premium to the markets average PE ratio, or they have a ratio that is larger than the market average. While in the case of telecom and the power sector, it is the favourable outlook that keeps the valuation multiples high, in the case of the oil and gas sector it is not the case. The oil and gas sector has seen an erosion in earnings, hence the denominator (earnings) had fallen faster than the price, hence the higher ratio.

Among the 35 major industries, construction, trading, electric equipment, engineering, electronics, sugar, media and retailing showed significant decrease in their P/E on November 11,2008, compared to November 12, 2007.

The average P/E ratio of 81 construction companies showed a decline from 49.71 times to 10.01 times. The M-Cap of the 81 construction companies decreased by 72.6% to Rs 1.14 lakh crore on November11,2008 from Rs 4.17 lakh crore on November 12, 2007. But the trailing four quarters net profit of these companies increased 35.9% during the same period. The top five industries, according to their P/E ratio on November 11,2008, are retail, trading, entertainment, textiles and telecom. In contrast, on November 12, 2007, the top five industries were trading, sugar, retailing, construction and media.