The rise and rise of the 1,000 P/E stocks

The most expensive of these are even trading at over 10,000 times annual earnings

Nearly two dozen companies trading at more than 1,000 times their annual earnings. The highest of these trades at a price to earnings (P/E) ratio of over 88,000, according to a Business Standard analysis of Capitaline data.

Only companies with a minimum Rs 500 crore in market capitalisation were considered. There were 55 companies at a P/E multiple of 100 or more and 23 others trading at a P/E of more than 1,000. The ratio is a measure of how expensive a company is, relative to its earnings.

The benchmark Sensex or Nifty is an index made of India's largest listed companies. It generally trades at a P/E of under 20.

The companies with the highest P/E ratios include Mangalam Industrial Finance (88,072.82), Appu Marketing & Manufacturing (78,848.39), Marico Kaya (47,708.92), Modi Udyog (15,086.04) and Ojas Asset Reconstruction Company (12,059.59). The median sales figure for the top 23 companies was Rs 17 crore. Some like Modi had net sales of Rs 1 crore and a market capitalisation of Rs 600 crore. The bottom four companies had sales of less than Rs 1 crore in the last financial year for which data is available.

Reasons for a high P/E include investors who value companies with poor earnings on the basis of assets such as land. Some instances of market manipulation were also uncovered by the regulator this year. Even excluding such cases, earnings overall are yet to catch up with valuations even among larger companies, say experts.

The BSE’s Sensex is trading at a P/E of 19.58. However, others have said that relatively higher valuations even among blue-chips is a function of the current market cycle.

Vaibhav Sanghavi, managing director, Ambit Investment Advisors, said valuations as a function of earnings tend to look expensive at the beginning of a cycle.

“At the bottom of a cycle, valuations will always be optically expensive. This is because of lower capacity utilisation and higher interest cost. Interest rates have been high for a while. As the cycle turns, there is anticipation that spare capacity will be utilised and interest cost will come down, resulting in a pop-up in earnings. Such anticipation can be justified in good companies, where products have a competitive edge,” he said.

“The current valuations reflect the fact that macros have caught up with expectations but this has not translated into corporate earnings…Earnings should begin to catch up in around six months, give or take a quarter,” said V Balasubramanian, head (equity) and fund manager, IDBI Asset Management.

Interest rates have been cut by 50 basis points since January and experts expect a further cut of 25 bps in June.