The Hindu Business Line : Buying a slice of tomorrow’s profits

Mumbai, Oct. 29 The most expensive stock just got a bit more expensive at today’s trading. The ownership of a rupee of profits, in Larsen & Toubro, which was available at close to Rs 63 at close of trading on Friday last at the BSE, can now be had only for a little over Rs 70 or at a price earnings multiple (or just P/E for short) of 70 as the market would describe it. The reason? The price just shot up by approximately Rs 400 in the day from Rs 3,876 to Rs 4,277.

Clearly, investors aren’t paying hard cash for today’s profits. For at Rs 63 of investment, a return of just a rupee doesn’t match even returns from a Swiss bank, assuming you have the money that is large enough and a record that is clean to match, which would interest the average Swiss banker. Investors are paying top rupees for a slice of profits that wouldn’t stay at a mere rupee but in fact would balloon to something far larger with every passing day.

The India infrastructure story (the Indo-US CEO Forum just spent a day here in Mumbai discussing opportunities on that count) is not only helping to sustain an image of profits that is set to grow at a fair clip. After all putting up roads, power projects, dams and now ports and ships are ideas that are associated with L&T.

The same infrastructure story is coming to the aid of BHEL, which too is going at a P/E multiple close to 50. It is the same story with telecom companies — Bharti Airtel and Reliance Communication or the power major, Reliance Energy. They sport different facets of the same theme.

To a lesser extent financial sector too is beginning to get associated with the growth and investment boom in infrastructure. If there are profits to be made by flogging assets such as roads and power plants, then there surely must be a share for the banker who helps put it on the ground with a wave of his investment-banking wand.

The software sector stocks with P/E multiples in the region of 25, isn’t quite able to capture investor imagination to the same extent as those connected with infrastructure despite all the talk about software being the glue that binds the information super highway.

If cement stocks, with a sub-20 P/E, are weighed down by the tale of an ‘era of surplus’ being just round the corner for the pharma sector (sub-25 P/E), it is a case of price pressure of a similar kind in the global generics market. The story goes on.

But none of this need matter to you if you are in the market at the going price because there is somebody else who believes in infrastructure or some other story, you couldn’t be blamed. A great number of economists think that is what is at work here.

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