In your interest.
Online Personal Finance Magazine
No beating about the bush.
Athough the Sensex is a good way off from its all-time high of 21,000-plus, the index’s current P/E valuation is close to its high of January 2008, which means further gains may be fuelled solely by the liquidity factor
The jingles of the Sensex hitting 21,000 are being heard once again after it made a 20-month high on Tuesday. However, the only question that arises is: What will drive the Indian markets to new highs? Which are the stocks that are still undervalued relative to the previous highs of the Sensex in terms of the market expert’s favourite tool, the price-to-earnings (P/E) ratio)?
On 1 January 2008, the P/E ratio of the Sensex was 26.10 based on March 2008 earnings. But no one expected that the market would plunge 64% from a high of 21,207. Currently, the forward P/E of the Sensex is 21. For the Sensex to reach new highs, it will have to rally 20% from the current level which will take the Sensex P/E to over 25. But the question is: Are the index heavyweights still undervalued enough to carry on the index rally? Let’s check.
Among the Sensex-30 stocks, index heavyweights Maruti, Tata Motors, Infosys Technologies, Mahindra & Mahindra, Tata Consultancy Services and Hindalco are much more expensive than they were in January 2008. For instance, the forward P/E of Maruti is 27.10 against 16.55 two years ago. That of Tata Motors is 25.75 (14.50), Infosys is 25.12 (22.37), M&M is 23.98 (19.27), TCS is 23.34 (22.89) and Hindalco is 13.67 (9.24). It is, therefore, unlikely that these stocks will push the market higher.
On the other hand, in 2008, the forward P/E of DLF, Reliance Communications and Reliance Infrastructure were an eye-popping 70.94, 59.09 and 49.69, respectively. These stocks are cheaper now, as is Bharti Televentures. But Bharti is in the same boat as Reliance Communications, badly battered by intense competition in the telecom business. So, it is unlikely that any of these four companies will be able to drive the market higher. Let’s now consider Larsen & Toubro and Bharat Heavy Electricals. Neither of these two stocks is currently cheap. Other index heavyweights like HDFC Bank, Housing Development Finance Corporation, ITC, Wipro and Hindustan Unilever have the same P/E as in January 2008. Tata Power (42.59), Sun Pharmaceuticals (26.14) and Hero Honda (20.69)—three stocks that have only recently been added to the Sensex—are also more expensive now than in January 2008.
The only stocks that are still cheaper than what they were two years ago are ICICI Bank, Reliance Industries, Oil & Natural Gas Corporation, ACC, Grasim Industries and Jaiprakash Associates. Can cement stocks lead the market higher?
While the demand for cement remains strong, there is a problem of regional oversupply. So, all eyes will be on RIL and ONGC. Will the flow of speculative money target these stocks over the coming weeks?