NEW DELHI: If a low price-to-earnings (PE) ration gives you comfort while buying stocks, market performance this year might puzzle you.
Investors are chasing high PE stocks in recent times, pushing stock prices higher, thanks to growth visibility and next-to-nil governance issues.
And analysts are not worried. They expect many of these performing counters to sustain their high valuations.
This was visible in the top gainers of BSE200 basket this year. Data showed 32 BSE200 stocks jumped between 30 and 125 per cent this calendar despite having an average PE of 50. Twenty-three of the 32 stocks have trailing 12-month PEs of 40 or more, data compiled from corporate database Ace Equity suggests.
Info Edge, which commands a PE of 84, has jumped 74.41 per cent this calendar. Drug maker Abbott India has climbed 67.75 per cent even at a PE of 51.1. In case of Info Edge, the industry average PE stands at 53.3, AceEquity data suggests. In the case of Abbott India, the industry PE is 26.5.
JM Financial said it is positive on the Info Edge as the core businesses have delivered superior performance consistently. It noted that the business of 99acres reported over 20 per cent growth in billings in September quarter, even in a weak underlying market. The brokerage sees more upside on the stock.
In case of Abbott, ICICIdirect cited the drugmaker’s strong growth track in power brands and capability of new launches on a fairly consistent basis – 100 products in the last 10 years – to justify a ‘buy’ rating.
It noted that the company has maintained dividend payout of 35 per cent in the past four years, with cash/share of Rs 793 in FY19.
Berger Paints and Bajaj Finance have soared 50 per cent each this calendar. While Bajaj Finance commands a PE of 48 times, Berger Paints enjoys a PE of 77. The paint’s industry PE currently stands at 64.1. For Bajaj Finance, the industry PE is 25.3.
Post its Q2 results, JP Morgan said Bajaj Finance’s numbers are positive. It said while it took note of the punchy valuation, it felt they can sustain as the NBFC continues to deliver sector-beating loan and EPS growth and ROEs.
The same is not the case with Berger Paints. Emkay Global said while it sees good earnings visibility, valuations at 58 times FY21E EPS are expensive and the stock’s 15 per cent premium over Asian Paints looks unjustified.
Whirlpool of India, which has a PE of 56.4, has surged 56 per cent. Analysts are positive on this stock, but sees limited upside after the recent jump.
Among others, Bata India, Nestle India and Varun Beverages are some other high PE stocks that have performed well this year.
Bata’s Q2 numbers showed margin improvement on a YoY basis for the 14th successive quarter.
“Although near-term valuation seems to have peaked, the company is well-placed in the sector, which has a big opportunity size. We believe it can be a good buy for the long term,” Edelweiss Professional Research said in a note.
Steward & Mackertich has initiated coverage on Varun Beverages with a ‘Strong Buy’ recommendation, valuing the stock at 30 times its CY2021 EPS.
Meanwhile, PI Industries has rallied 76 per cent so far this calendar. The stock trades at 45.3 times its trailing 12-month earnings per share.
“It would be too much to hope for investors to suddenly worry about super-rich valuations of growth or quality stocks,” Kotak Institutional Equities said in a note.
In a recent study on BSE100 stocks, Marcellus Investment Managers found that there is no significant correlation between starting period valuations and subsequent long-term returns.
Instead, in each of the historical phases, there has been a strong correlation between earnings growth rates and share price returns, the study concluded.
Shares of AMCs HDFC AMC and RNAM have rallied 125 per cent and 121 per cent, respectively, this year. Their PEs stood at 61.6 per cent and 41.1 per cent, respectively, and EV/Ebitda at 43.3 and 28.9.
Adani group stocks Adani Transmission and Adani Gas have gained 62-67 per cent this calendar with PE values of 46.6 and 55.6, respectively.
Source: Economic Times