Stocks are now more expensive than on the eve of 2008Lehman crisis and valuations are inching closer to highs of year 2000 dot-com bubble. Country’s top 1000 non-financial listed firms are now trading at 25x their earnings in last four trailing quarters higher than price to earnings multiple of 17.6x in March 2008 and just 20% cheaper than 29.5x in March 2000. (See Chart)
The market also looks pricey on other two key valuation parameters –price to book value ratio and earnings yield. Stocks in our sample are now trading at 2.9x their book value or the combined net worth (or equity) of all 1000 companies in our sample at the end of March 2014. The corresponding ratio was 3.6x in March 2008 and 2.8x in March 2008.
The earnings yield for the sample has dropped to 4.1%, lower than the corresponding ratio (5.8%) in March 2008 and closer to March 2000 level (3.4%). On this basis the stocks in our sample were relatively cheaper in 2008 on the eve of Lehman crisis. Earnings yield is ratio of a company’s latest annual net profiit and market capitalisation. It shows the yield to an equity investor if the company distributes its entire net profit as equity dividends.
The analysis is based on the profitability and market capitalisation of country’s top 1000 non-financial firms ranked according to their revenues for every financial year beginning March 1995. The sample for a respective year includes only those firms that were listed on stock exchanges in that respective financial year. The current valuation is based on net profits for these companies for the trailing 12-months ending December 2014.
If in year 2000, the exuberance was in IT and new media stocks with Wipro and Zee Entertainment trading at over 500 times their trailing earnings respectively; now investors are giving triple digit valuation to mid-size companies in auto & auto component and consumer goods sectors. For example, auto component maker Mahindra CIE is trading at 200x its trailing earnings while its peers Wabco India and Bosch are trading at 86.3x and 77.1x respectively. Gillette India is the most expensive consumer goods maker with P/E multiple of 197x. (See table).
The trend remains intact even if we exclude extreme valuations and take median values. A typical company in the sample is current valued at around 12x their trailing earings compared to 10.7x in March 2008 and 4.8x in March 2000. In the last twenty years, the stocks have traded at 16.7x their trailing earnings and 2.2x their book value on average.
Others blame it on valuation re-rating in the mid and small cap space. “There is lot of exuberance in many pockets of the market especially mid-caps and small caps. This doesn’t mean that market may not rise further but we are no more comfortable with the valuations given that strong earnings growth is yet to materialise,” says research head at a brokerage house on the condition of anonymity.
But even if we accept TINA factor, the risk to reward ratio is worsening for equity investors with each market high. At current valuation, it will take investors nearly 80 years to recover their equity investments at the current rate of earnings yield assuming India Inc average pay-out ratio of 30%. This figure was closer to 45 years in 2003 and 2009, when two big rallies started.
| Some of the most expensive stocks | |||
| Now | In March 2008 | ||
| Company | P/E Multiple | Company | P/E Multiple |
| Mahindra CIE | 202.3 | Vatsa Music | 5715.3 |
| Gillette India | 196.9 | Shyam Telecom | 528.1 |
| Blue Dart Exp | 138.9 | Zee Entertainmen | 507.7 |
| A B B | 110.9 | Wipro | 507.0 |
| WABCO India | 86.3 | Infosys | 200.7 |
| Jubilant Food. | 85.5 | H F C L | 141.1 |
| Page Industries | 83.8 | Gillette India | 111.3 |
| Bosch | 77.1 | Polaris Consulta | 86.8 |
| Glaxosmit Pharma | 75.2 | NIIT | 76.5 |
| Pidilite Inds. | 61.1 | Silverline Tech | 72.9 |
| P/E : Trailing price to earning multiple P/B : Trailing price to book value | |||
| Source: Capitaline Compiled by BS Research Bureau | |||
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