The companies that have gained the most over the last three-month period are having a high Price/ Earning ratio of 50 to 100 and even more.
Mumbai: As global and domestic risks buffet the equity market, investors are ready to give a high premium to safety, it seems. A study of BSE 500 companies shows that stocks with even steep P/E values are in good demand now.
The companies that have gained the most over the last three-month period are having a high Price/ Earning ratio of 50 to 100 and even more. Some companies in this category are: Avenue Supermart, the promoter of D-Mart stores (16 per cent gain in three months), Tata Group’s Trent (20.1 per cent), SBI Life Insurance (23.3 per cent), HDFC Life Insurance (28.7 per cent), Dabur (19.5 per cent), Asian Paints (16.2 per cent) and Naukri-promoter Info Edge (15.8 per cent).
The P/E ratio of these companies are currently upwards of 50 compared to the BSE 500 Index’s P/E of 25 and Sensex’s P/E of 26, indicating, theoretically, the number of years it will take for these companies to pay back the amount paid for each share purchased at current market price--assuming that these companies do not grow from the current level and their earnings stay constant.
P/E ratio is the relationship between a company’s stock price and earnings per share (EPS). It is a popular ratio that gives investors a better sense of the value of the company.
Naveen Kulkarni, Head of Research, Reliance Securities, said, “The general trend that we continue to witness is that B2C companies with low leverage and limited capex requirements have continued to outperform the broader market. They have managed to buck the trend of major slowdown and have beaten expectations. Investors are moving towards safety and therefore these stocks have continued to be the darling of the stock market.”
Investors generally think twice before buying a company stock with high P/E ratio. Most consumer goods (FMCG) companies currently have very high P/E ratio but investors are ready to pay a high premium for these stocks as these are considered safe and stable stocks that brave business cycles.
FMCG leader Hindustan Unilever’s P/E is 64 and its last three months return is 8.3 per cent. Similarly, Dabur has a P/E of 50 and its three-month return is 19.5 per cent.