Nifty cos’ P/Es shoot up, but it’s safety first

Valuations seen driven more by liquidity and strong sentiment than fundamentals this time around
Ranjit Shinde ET INTELLIGENCE GROUP

AT LEAST five companies in the benchmark Nifty are now more expensive based on their price-to-earnings (P/E) multiples than they were nearly 16 months ago, when indices had hit all-time highs.
With Monday’s magical rally, most analysts recommend caution to investors, now that fundamentals have been set aside. Experts believe P/E valuations are now driven more by liquidity and strong sentiment, both of which will continue to prevail in the market.
On Monday, as many as 15 scrips among the 50 components of the Nifty were trading at P/Es either higher or very close to the levels seen during the all-time high on January 8, 2008. This can be attributed to a gradual fall in earnings of these companies over the previous four quarters and a sudden, disproportionate rise in their stock prices.
This also means valuations are no longer at a discount to market peaks at a time when fundamentals point to a tough economic scenario.
Among the 50 Nifty components, Tata Communications has seen the highest jump in its P/E multiple from 44.3 on January 8, 2008 to 63. Other scrips to show a substantial rise in P/Es were automakers Mahindra & Mahindra, Maruti Suzuki, and Hero Honda Motors.
Some analysts feel that the gains are momentary and lack fundamental strength. “We expect some consolidation in the near term at current levels. A new trend can be seen once there is greater visibility for the second half of the current fiscal and also for the next fiscal after the budget and monsoon,” said Dipen Shah, VP-PCG research of Kotak Securities. He expects this to happen by the September quarter.
SBICAP Securities’ research head Anil Advani thinks the revival in FII funds flows and euphoric market mood spell some amount of uncertainty in the coming weeks. “Though, as of now, valuations have been set aside, these would matter in the long term. One has to be selective while investing at these levels,” he says. However, some experts feel that investors have moved their attention from defensive stocks in FMCG and IT to other growth sectors after renewed confidence in the economy. “A lot of attention has been paid to fundamentals, of late, thereby ignoring two other important aspects of the equity market — liquidity and sentiment. I think these two factors hold a strong promise, going ahead,” says investment advisor SP Tulsian. He thinks investors can look for scrips in infrastructure, banking and sugar, apart from all frontline stocks in other sectors.
Mr Shah of Kotak Securities, however, recommends caution. He says, “Retail investors are advised not to look for shortterm investments at current levels since the market has moved up significantly. In the longer term, companies with domestic focus in areas, including infrastructure, retail and insurance, can be considered.”
Cement companies, including ACC and Ambuja Cements and pharma major Cipla, are now trading at P/E valuations, which are a tad lower than their peak valuations.
Moreover, all Nifty components have seen valuations rising from their levels in the second week of March 2009, when the market had tanked to a three-year low.
ranjit.shinde@timesgroup.com