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There are nearly two dozen companies who are trading at more than a thousand times their annual earnings.
According to Business Standard's analysis of Capitaline data, the highest of these trades at a price-earnings ratio of over 88,000. It should be noted that only companies with a minimum Rs 500 crore in market capitalisation were considered.
There were 55 companies which were trading at a price to earnings (P/E) multiple of 100 or more, besides 23 other companies who were trading at a P/E of more than 1,000.
The P/E ratio is a measure of how expensive the company is relative to its earnings. The benchmark Sensex or Nifty is an index made up 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 Rs17 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 their assets such as land. Some instances of market manipulation have also been uncovered by the regulator this year. Even excluding such cases of potential market manipulation in smaller companies, earnings overall are yet to catch up valuations even among larger companies, according to experts.
The BSE Sensex is trading at a P/E of 19.58. However, others have said that relatively higher valuations even amongst blue-chips is a function of the current market cycle.
Vaibhav Sanghavi, managing director, Ambit Investment Advisors said that valuations as a function of earnings tend to look expensive in the beginning of a cycle.
"At the bottom of the 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 now. As the cycle turns there is anticipation that spare capacity will be utilised and interest cost will come down, which will result in a pop 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 time, 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 basis points is expected to come in June.
