The Hindu Business Line : Surprise! Nifty PE is actually 19

STOCK prices of Indian companies have risen more than 100 per cent in the past couple of years and the price-to-earnings multiple put out by the stock exchanges is still at 15. If this has you readying for another bull charge, hold on.

The average PEM of Nifty stocks now is actually 18.5. In the hey-day of March 2000, the PEM of the Nifty stocks was 13.7. Similarly, the average PEM of profit-making stocks in March 2000 was 8.5. Now, it is 17.3. Contrary to what market watchers would have you believe, with the rise in stock prices, PEMs have expanded.

The PEM of 15 that is touted by many people and put out by the stock exchanges is based on aggregate profits and market capitalisation of the index stocks. That is, you sum up the market capitalisation of Sensex or Nifty stocks and divide that by the aggregate profits to get the PEM. This PEM is lower than the average because large-profit making companies such as ONGC and Reliance are trading at PEMs of less than 12. If you exclude ONGC and Reliance, this PE will rise to 19.3.

Excepting Sensex, the average PE of almost all indices is now at least 50 per cent higher than what it was in March 2000. For instance, the average PEM of Nifty Junior in March 2000 was 10.3 and it is now 15.8. In the case of Sensex stocks, the average PEM now is marginally lower than what it was in March 2000. The March 2000 PEM was affected by the rich valuations of IT, healthcare, consumer and private sector banking stocks. Since this rally has been much more broad-based than the one in 1999-2000, valuation of all sectors and stocks has risen leading to an expansion in PEMs. This means that more stocks are now trading at rich valuations than at anytime in the past.

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