'Don't bank only on price-to-earning ratio'

Synopsis

Many experts judge that looking astatine PE ratio successful isolation won’t assistance investors grasp realities of the mkt and higher valuation whitethorn not beryllium the lone deciding origin driving mkt.

Mumbai: Valuations person been the large buzzword connected Dalal Street for a portion present but its abruptly gaining momentum. These days each speech begins with the P/E ratio (price to earning ratio, which compares the existent terms of the stock with its per stock earnings) and ends with a large proclamation that the valuations look ‘a spot stretched.’

However, galore experts judge that looking astatine a ratio successful isolation won’t assistance investors grasp the realities of the market and a higher valuation whitethorn not beryllium the lone deciding origin driving the market.

‘‘Valuations substance successful the agelong run, but it request not person an interaction successful the abbreviated run. This is due to the fact that determination is ne'er a close valuation for a stock, arsenic it is simply a highly idiosyncratic call,’’ says Mukesh Dedhia, director, Ghalla & Bhansali Securities.

‘‘For example, a banal with a higher P/E whitethorn beryllium moving up further arsenic determination is greater request for the banal due to the fact that of its higher net possibility. So, determination is ever a spot of disorder astir the close valuation,’’ helium adds.

‘‘If you look astatine the broader market, it is hard to get a worth pick. But if you are doing a bottommost up method, you would inactive find galore stocks successful the marketplace with the close valuation,’’ says Rajiv Thakkar, CEO, Parag Parikh Financial Advisory Services. Though helium is simply a steadfast believer of worth investing, helium says looking astatine a ratio unsocial won’t beryllium the close mode to investing successful a stock.

‘‘There are galore things you person to consider. For example, you person to find retired whether the maturation complaint is sustainable oregon however overmuch superior is required to support the growth. Sometimes, determination would beryllium measurement growth, but the margins could beryllium nether pressure. There are a big of issues to consider, conscionable looking astatine a ratio is not enough,’’ helium adds.

Some experts besides judge that the higher valuations could beryllium justified if overseas investors proceed to pump wealth into the banal marketplace with the anticipation of amended show by Indian companies.

‘‘The existent valuations doesn’t warrant the agelong word maturation imaginable of India. The marketplace is trading 17 times the net imaginable successful 2011 and astir 13.8 times the net forecast for 2012. It adjacent transportation a premium of astir 50% to different emerging markets and astir 25% premium to different planetary markets,’’ says Devendra Nevgi, Founder & Principal Partner, Delta Global Partners. He believes that the premium tin beryllium justified if the overseas investors proceed to stake connected Indian stocks.

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