Historical and Expected P/E Ratio of Indian Stock Market

Historical and Expected P/E Ratio of Indian Stock Market

P/E ratios in India during 1990 and 2005

As of December 31, 2009, there were 23 government-recognized stock exchanges in India and there were more than 9,700 companies listed on these exchanges. The Bombay Stock Exchange (BSE) lists about half of these companies (4,929).

BSE happens to be the oldest in Asia, having been established as "The Native Share & Stock Brokers Association" in 1875. As of December 31, 2009, the market capitalization of the companies listed on BSE was approximately USD 1,400 billion (approximately 1.1 times India’s annual GDP).

Since BSE has the most well-known indices within the Indian stock market, we focus on a few of these indices in this article: SENSEX (with a base of 100 in 1978-79), BSE-100, and BSE-500 (with a base of 1,000 in 1999 and comprising 500 listed companies in various Indian stock exchanges).

Ignoring dividends, both SENSEX and BSE-100 have grown by 13.4% annually in Indian Rupee terms during April 1, 1991 and March 2005. On March 31, 2005, SENSEX was valued at 6,492.82 (with a P/E ratio of 16.05) and BSE-100 was valued at 3,481.86 with a P/E ratio of 13.72. This growth rate can be partitioned into the following three components:

1. The companies comprising SENSEX and BSE-100 have individually grown at an average annual rate of 9% or more (in real terms) and 15% (in nominal terms).

2. As shown in the table 1 given below, the price-earnings ratio for companies listed in SENSEX went down from 19.68 in March 1991 to 16.05 in March 2005, i.e., an average drop of approximately 1.5% per year. Similarly, the price earnings ratio for companies listed in BSE-100 dropped by approximately 2.4% per year.

3. The difference between (1) and (2) approximates the average annual growth rate of SENSEX and BSE-100 of 13.4% as mentioned above.

Predictions regarding the Indian Stock Markets during 2005 and 2015

The following three main components are likely to result in a strong upward movement of Indian markets:

1. During April 2005 and March 2015, companies listed in SENSEX, BSE-100, and BSE-500 are expected to grow at an annual average rate of 11% (in real terms) and 17% (in nominal terms).

2. In March 31, 2005, the firms in SENSEX were trading at an average P/E ratio of 16.05 whereas they were trading at an average price earnings ratio of 22.8 during 1991 and 2005. Our analysis shows that by December 2015, these firms (that are part of SENSEX, BSE-100, and BSE-500) are likely to trade at an average P/E ratio of 22.8 also, partly because of volatility and partly because the annual growth rates of these companies is quite high when compared to their counterparts in the United States and other developed countries.

3. As a comparison, during the past fifteen years, an average firm in China’s stock market has been trading at an average price-earnings ratio of 23. Clearly, on one hand, since the stock markets in the United States are much bigger and more mature, the companies listed there likely to command a higher premium; on the other, since these earnings are computed on the “last twelve month” basis and since the companies in India (and other emerging countries) are growing more rapidly – as much as 7-8% more – than their counterparts in the United States, we believe that the SENSEX, BSE-100, and BSE-500 will trade at an average price/earnings ratio of 22.8 (during 2005 and 2015).

 Happy Investing

Source:Saralgyan