The Hindu Business Line : Mid-cap stocks' higher price-earning ratio worries investors

PRICE-EARNING (P/E) ratio of mid-cap stocks has caused concern among the investors, as it is much higher than that of the large-cap stocks. This is seen from the comparison of P/E ratios of BSE Sensex, S&P CNX Nifty and CNX Midcap indexes.

P/E ratio for mid-cap stocks is generally lower than large-cap ones, experts said. P/E ratio is price of a stock divided by earning per share (EPS) of the company.

For an index, it is the value of the index divided by the consolidated EPS of companies in the index.

Based on the closing value of these indexes on Friday and EPS for the trailing four quarters (up to March 2005), P/E of Sensex is 15.74, for S&P CNX Nifty it is 14.1 and for CNX Midcap it is 19.4.

"P/E ratio should be exactly opposite to what we are seeing in this situation," said Dr L.C. Gupta, Director, Society for Capital Market Research and Development.

Dr Gupta, who has done a study on P/E ratio for India companies, said companies with stable growth commands a higher P/E ratio.

The premium in P/E ratios by mid-cap companies is seen as risky and this cannot be sustained, experts said. "The difference at this time is close to 25 per cent which cannot be justified," said Mr Arun Kejriwal of KRIS Research said.

Last week there was fall in mid-cap stocks and some of the retail investors have exited in several of them.

But in the last one-month, mid-cap stocks have outperformed the large-cap ones. During this period Sensex rose by 6.13 per cent, S&P CNX Nifty by 4.12 per cent and CNX Midcap index by 11.4 per cent.

Fund managers upbeat: However fund managers are still upbeat on the mid-cap stocks and they don't see anything unusual in their commanding higher P/E ratios. Several of the funds in the last couple of months have launched new schemes with objective to invest in mid-cap stocks.

"Several mid-cap companies will grow faster than the large-cap ones and so they get higher multiples," said Mr Nilesh Shah, President, Kotak Mahindra Mutual Fund. He said one should not look at historical P/E ratio, but for the current year. "This year several mid-cap companies will grow 25-30 per cent," he said.

Mr Sandeep Shenoy, a strategist at Pioneer Intermediaries, said mid-cap companies get higher valuation when they grow at faster rate, but when the growth slows down, they will get lower multiples.

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