The Hindu Business Line : IBM is cheaper than Infosys!

While a rupee of earnings of the 30 stocks that make up the basket of stocks constituting the Dow Jones Industrial Average can be bought for Rs 16.3 (P/E ratio), the Sensex basket goes for Rs 20.3 for the same one rupee of earnings, measured on historical profits. That has made a host of big American names such as Microsoft, IBM, Exxon, and Coca-Cola cheaper to own than many Indian stocks!

A one-on-one

The market seems to have more faith in the ability of an average Indian spending on consumer goods/services than in that of the average American. The US companies whose revenues depend on consumer spending (for example, FMCG, telecom and banking), trade at considerable discounts compared to their Indian counterparts.

For instance, Hindustan Unilever and ITC trade at PEs of 24.7 times and 29.0 times respectively, while the American giants such as Coca-Cola, Johnson & Johnson, Kraft Foods and McDonald's trade at a much cheaper 13-19 times.

The picture is more or less the same with Indian IT companies as well. Infosys, TCS and Wipro are far more expensive than the American big-wigs such as Cisco, General Electric, Hewlett-Packard, IBM and Microsoft. The Indian companies sport a PE of 22 -25, making IBM and Hewlett Packard, at just over 13, seem positively cheap. Microsoft Corp is trading at 18 times, still a lot cheaper to the Indian market. Intel (at 23.02 times) is the only tech company that trades at valuations on par with the Indian tech majors.

In the capital goods sector too, BHEL (35 times), JP Associates (70 times) and L&T (30 times) trade at huge premia over the US's Caterpillar (22 times). Sun Pharma (16.62 times), the lone healthcare representative in the Sensex, is also trading at a premium to US healthcare majors such as Merck and Pfizer.

It would also be cheaper to pick up AT & T and Verizon (at 11.56 times and 13.01 times respectively), compared to Indian telecom major, Bharti Airtel, which even after being beaten down in recent weeks is traded at 13.7 times.

In the case of banking stocks, barring Bank of America, the other two financial institutions which figure in the Dow Jones, namely, American Express (27 times) and JP Morgan Chase (27 times) are cheaper than Indian banks such as HDFC Bank and HDFC, whose PE hovers around 33 times. However, ICICI Bank (26.49 times) and SBI (12.99 times) are still cheaper than the American companies.

Metals at discount

However, one sector in which Indian stocks trade at a discount to the American ones is metals. Indian metal players are currently at a discount to companies such as Rio Tinto, Valle, Alcoa and BHP Billition.

Current year PEs of some of these stocks are distorted by losses, but one-year forward PE estimates of Hindalco and Sterlite Industries (11.28 and 12.03 times respective) is still at a significant discount to American miner – Alcoa (23 times). However, the race seems to be pretty much neck-to-neck, when compared to other global competitors. Rio Tinto, Vale and BHP Billiton trade at only slightly higherforward PEs of 13.66 times, 17.29 times and 19.96 times, respectively.

Ever since the crash of Detroit's Big-3, Dow Jones has no representation from the automobiles industry. Nevertheless, the Indian auto stocks such as Maruti Suzuki and Mahindra and Mahindra are still at a visible discount to Toyota Motor, Honda Motors and Volkswagen. According to Bloomberg estimates, Toyota and Honda discount their one-year forward earnings by 22.7 times and 16.1 times. On earnings for the year ahead, Maruti Suzuki and Mahindra and Mahindra trade at 16.94 times and 12.74 times.

The global picture

Within BRIC countries China remains an expensive bet. While Brazil, Russia and India trade at 20.2 times, 21.66 times and 20.31 times respectively, China's PE is at 32 times.

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