‘Don’t just bank on price-to-earnings ratio’
MUMBAI: Evaluation has been a big buzz on Dalal Street for some time but it is suddenly gaining momentum. Nowadays, every conversation starts with a P / E ratio (price-to-earnings ratio, which compares earnings per share to the current price of a share) and ends with a loud announcement that the valuations look ‘slightly extended’.
However, many experts believe that looking at the segregation ratio will not help investors realize the reality of the market and that high valuation may not be the only decisive factor driving the market.
“Evaluation is important in the long run, but it doesn’t have to be short-term. This is because the stock is never properly valued, as it is a very personal call, “said Mukesh Dedhia, Director, Galla & Bonsali Securities.
” For example, a stock with a higher P / E may go further because the demand for the stock is higher due to the higher earnings potential of the stock. So, there is always some confusion about proper assessment, “he added.
” If you look at the larger market, it’s harder to pick a value. But if you do a bottom-up approach, you will still find a lot of stocks in the market with the right valuation, “said Rajiv Thakkar, CEO, Parag Parikh Financial Advisory Services. Although he is a firm believer in value investing, he says simply looking at the ratio will not be the right way to invest in a stock.
“There are a lot of things you need to consider. For example, you need to find out if the growth rate is sustainable or how much capital is needed to sustain the growth. Sometimes, the volume may increase, but the margins may be under pressure. There are so many things to consider, it’s not enough to just look at one ratio, “he added.
Some experts also believe that higher valuations could be justified if foreign investors continue to pump money into the stock market in the hope of better performance for Indian companies.
“The current assessment does not support India’s long-term growth prospects. The market is trading 17 times its 2011 earnings potential and about 13.8 times its 2012 earnings forecast. It even carries about 50% premium in other emerging markets and about 25% premium in other global markets, “said Devendra Navgi, founder and main partner, Delta Global Partners. Can
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