Time to be wary of this ‘elite’ PE100 club

TAKING cues from the unrest in the global financial markets, Indian stock markets have crashed substantially over last few days. The Sensex has come all the way down to 14,809 shedding 29% from 20,827.5 on January 11, 2008. In the same period the price to earnings mul tiple (P/E) of the Sensex has plunged from 28.4 to 19 — a level, which was last seen only in March 2007. The price-to-earnings multiple reflects the investors' confidence in the future earnings of the companies constituting the benchmark index.

With its daily dose of bad news the stock markets continue to plunder investors’ wealth every day. However, even in these despairing times a quite a number of companies continue to command three-digit P/Es. It must be accepted that the number of companies claiming such high P/Es have certainly come down during the market meltdown and even for others the P/Es have eroded. Nevertheless, a P/E above 100 is certainly an indication of strong investor confidence about a company's bright future. While such PE may be justified in case of few companies, the same can't be true for all the companies in our list.

The elite group of 100-plus PE companies includes the over 90 companies such as Reliance Natural Resources (RNRL), Educomp and Moser Baer among others. Here we are excluding the recently-listed companies, which are yet to publish their full year's financials. Although the real estate industry got a thorough beating in the recent meltdown the companies such as Bombay Dyeing, Phoenix Mills, Jaybharat Textiles, Godrej Industries continue to occupy place in this elite club thanks to their real estate ventures.

BF Utilities — the division of Kalyani Group of India, using windmills to power steel plants operated by the large manufacturing company — is also trading at PE above 100. Despite lack of any major exploration success the valuations of Hindustan Oil Exploration have stretched up based on its hydrocarbon reserves.

However, the investors need to be wary of the fancy valuations attracted by such companies, which can evaporate quickly into the thin air. For example, against 29% fall in the Sensex, companies such as Moser Baer, BF Utilities, RNRL, Jai Corp have already lost over 55% of their market capitalisation since first week of January 2008.