‘Don’t bank only on price-to-earning ratio’

Mumbai: Valuation is already a big buzzword on Dalal Street for a while but it suddenly gained momentum. Today, every conversation begins with Ratio P / E (price-to-earnings ratio, which compares a stock’s current price to its earnings-per-share) and ends with a rave that the valuation looks ‘a bit stretched’.

However, many experts believe that looking at an individual ratio won’t help the investors Realistic grasp of market and higher valuations may not be the only determining factor driving the market.

” Valuation matters in the long run, but it doesn’t necessarily have to have an impact in the short term. This is because there is never a right valuation for a stock, as it is a highly personal call,’ said Mukesh Dedhia, director, Ghalla & Bhansali Securities.

” For example, a stock with a higher P/E could go further because there is greater demand for that stock due to its higher earning potential. So there’s always a bit of confusion about the right valuation,” he added.

”If you look at the broader market, it’s hard to get value choices. But if you’re taking a bottom-up approach, you’ll still find plenty of stocks in the market with the right valuations,” said Rajiv Thakkar, Managing Director, Parag Parikh Financial Advisory Services . While he’s a firm believer in value investing, he says just looking at a ratio won’t be the right way to invest in stocks.

”There are so many things you have to consider. For example, you have to find out if the growth rate is sustainable or how much capital is needed to maintain the growth rate. There will be volume growth at times, but margins can be under pressure. There are so many issues to consider, just looking at a ratio is not enough,” he added.

Some experts also suggest that a higher valuation could be justified if foreign investors continue to pump money into the stock market in the hope of better performance of Indian companies.

”The current valuation does not demonstrate India’s long-term growth potential. The market is trading at 17 times earnings potential in 2011 and around 13.8 times the earnings forecast for 2012. It even offers a premium of around 50% for emerging markets. other and around 25% premium for other global markets,” Devendra Nevgi said. Founder & Principal Partner, Delta Global Partner. He believes the premium could be justified if foreign investors continue to bet on Indian stocks.


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