Price-earnings ratio of Sensex companies decline in ayear

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 tra ding,
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 t o 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.


Financial Express