BSE-500 P/E ratio closing in on decade's average as correction sets in

The average price-to-earnings ratio of S&P BSE-500 stocks is now close to the average level of last 10 years. The correction in stocks that started a few months ago, coupled with strong earnings in 2021 quarters, has brought the PE ratios down, according to Bloomberg data.

The Bloomberg data uses the current price of the stock and earnings in the trailing 12 months to arrive at the P/E multiple.

Though there is no global or domestic benchmark for PE ratios, they have stayed in a certain range. For instance, the PE ratio for BSE 500 in India has largely stayed between 10 and 30. At the beginning of 2021, the BSE 500 PE ratio was close to 30, meaning that most stocks were overpriced than usual.

 

A softening of the PE ratios over the course of 2021, and in the last few months, suggests that stock prices reflect the financial health of the companies better than the last few years.

The stock market rallied strongly after the lows due to the coronavirus pandemic in 2020, on the basis that big listed firms were more capable of recovering and growing in an environment beset with troubles for small firms and the unorganised sector.

Some experts believe that the two-year rally in stock prices factored in a few years of corporate earnings growth, and it is likely that gains from pent up demand may flatten, which may plateau earnings. This could be one reason PE ratios are approaching the average.

Further, high input costs, and especially the cost pressures from rising crude prices in the international market can further nip margins.

 

Some sector stocks are still highly overpriced

There are, however, some sectors which still exhibit high price to earnings ratios. Consumer durables, as represented by S&P BSE Consumer Durables Index, is at a high PE ratio of 69.8 (February 8), a year after its peak of 87.79. IT stocks, which saw some correction in the last two months, are still overpriced, with PE ratio of 33.19 compared to the decade’s average of 20.62.

S&P BSE Bankex has a PE ratio of 21.88 as on February 8, 2022, compared to the decade average of 26.19. Unlike most other sectoral indices for which PE ratios peaked in the rally after Covid-19, the ratio for bank stocks listed on BSE peaked in the last quarter of calendar 2018. 

Companies in the healthcare sector have PE ratios come back to the 10-year average. FMCG stocks are trending lower than usual. The lowest PE ratio for BSE - 500 in the last decade was in the 2012-2014 period, when at times, it had gone below 15.

As 'Business Standard' reported last month, India’s equity market is one of the most expensive globally despite the recent correction. The Sensex is currently trading at a trailing price-to-earnings (P/E) multiple of 26.3x, nearly twice the MSCI Emerging Markets P/E of 13.9x and around 40 per cent higher than Dow Jones' 19.1x. Only the tech-heavy Nasdaq Composite is more expensive at a P/E multiple of 116.6x, according to the data from Bloomberg.