Price-earnings ratio of Sensex companies decline in a year

Written by Pradip Kumar Dey | Mumbai, Aug 26 | Updated: Aug 27 2008, 06:32am hrs
Most Sensex companies have shown lower price-earnings (P/E) ratio on August 26,08 as compared to august 27, 07 levels, an in-house study has revealed.

The average P/E of the 30 companies listed on the Sensex decreased from 20.05 times on August 27 last year to 17.90 times on August 26 this year. P/E for all BSE companies taken together was down from 22.13 times last year to 16.99 times on this August 26.

P/E ratio of a company depicts the multiple of earnings at which stock sells on the exchanges. It is calculated by dividing the price of a stock by its trailing annual earnings per share (EPS). The higher the P/E ratio, the more the market is willing to pay for each rupee of annual earnings. Companies with high P/E ratios are more likely considered risky investments than those with low P/E ratios, since a high P/E ratio signifies high expectations.

Sector-wise P/E ratios for BSE companies show that firms in trading, retailing, textiles, oil drilling, food processing, shipping, aluminium, pharmaceuticals, oil and gas, cigarettes, and electricity sectors have performed well during the period (Aug 27, 07 to Aug 26, 08). The average P/E ratio of 37 companies in the trading sector registered a considerable rise, up from 70.89 times on August 27, 07 to 158.66 times on August 26, 08. Market cap (M-cap) of the above companies increased by 294.5% to Rs 1,38,610 crore as compared to Rs 35,135 crore last year. The trailing four quarters net profit of these companies increased by 76.2% during the same period. In case of the retailing sector, average P/E ratio of 6 companies increased from 97.10 times to 158.21 times this year. Total M-Cap of this group decreased by 24.2% to Rs 10,079 crore and the trailing net profit decreased by 53.5% to Rs 64 crore.

Similarly in case of the textiles sector, average P/E ratio increased from 16.23 to 25.97 during the study period. Total M-Cap of 250 textile companies decreased by 17.9% to Rs 40,246 crore on August 26, 08 from Rs 49,051 crore on August 27, 07.

The trailing four quarters net profit decreased by 48.7% during the same period. Among the 35 major industry groups, top five industries according P/E ratio on August 26, 08 were trading (158.66), retailing (158.21), sugar (50.16), entertainment (45.98) and telecommunications (27.35). The line-up of top five industries based on P/E ratio on August 27, 07 was as follows: retailing (97.10), trading (70.89), sugar (63.23), media (51.37) and entertainment (48.09). Media, retailing, entertainment and trading are common for both the periods.

The lowest P/E ratio during the study period was seen in the case of paper (6.5) and tyres (7.0). Out of 35 industries, 13 industries P/E ratio increased during the period.