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‘Do not simply financial institution on price-earnings ratio’

Mumbai: Valuations have been the buzzword in Dalal Road for some time, but it surely’s abruptly gaining traction. Right now, each dialog begins with the P/E ratio (price-to-earnings ratio, which compares the present value of the inventory to its earnings per share) and ends with a loud assertion that valuations look “a bit stretched.”

Nevertheless, many consultants imagine that taking a look at an remoted ratio won’t assist traders perceive the realities of the market and a better valuation is probably not the one deciding issue driving the market.

Valuations are necessary in the long run, however needn’t have an effect within the brief time period. It is because there may be by no means a correct valuation for a inventory as it’s a very particular person choice,” mentioned Mukesh Dedhia, director of Ghalla & Bhansali Securities.

For instance, a inventory with a better P/E could transfer additional as a result of there may be extra demand for the inventory because of the increased revenue alternative. So there may be at all times some confusion concerning the right valuation,” he provides.

”While you take a look at the broader market, it is arduous to get a worth choose. However for those who use a bottom-up method, you’d nonetheless discover many shares out there with the correct valuation,” mentioned Rajiv Thakkar, CEO of Parag Parikh Monetary Advisory Companies. Whereas he is a giant believer in worth investing, he says simply taking a look at a ratio is not the correct method to spend money on a inventory.

“There are lots of issues you need to keep in mind. For instance, it’s good to discover out whether or not the expansion fee is sustainable or how a lot capital is required to maintain development. Generally there may be quantity development, however margins can come underneath strain. There are lots of issues to think about, simply taking a look at a ratio is just not sufficient,” he provides.

Some consultants additionally imagine that the upper valuations could possibly be justified if overseas traders proceed to pump cash into the inventory market in hopes of higher efficiency from Indian corporations.

“Present valuations don’t justify India’s long-term development potential. The market is buying and selling at 17 instances the earnings potential in 2011 and about 13.8 instances the earnings forecast for 2012. Actually, it has a premium of about 50% for different rising markets and about 25% premium for different world markets,” mentioned Devendra Nevgi, Founder and lead companion, Delta International Companions. He believes the premium is justifiable if overseas traders proceed to guess on Indian equities.

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