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Manufacturing firms' P/E sinks to 6-year low

Samata Dhawade

The price-earning ratio of private sector manufacturing companies has hit a six-year low. A sample of 302 profit making companies from the sector shows that their P/E has tumbled from 17.32 in 1994-95 to 9.92 in 2000-2001.

Market experts say that the fall in the ratio reflects the market's concern over the viability of the Indian manufacturing sector in the emerging scenario which requires companies to be more competitive in order to survive.

Interestingly, the companies in the sample had a compounded annual growth rate of 10 per cent in net profit and a CAGR of 15.2 per cent in sales income during the past six years. Yet, the aggregate market capitalisation had a negligible CAGR of 0.02 per cent during the period.

The trend clearly reflects the market efficiency and vision, by which it takes into account not only the current earnings of a company but also potential earnings in future.

"The current market is not at the mercy of operators who earlier used to manipulate liquidity in individual stocks. The institutions now play a prominent role," Jigar Shah, head of research, K R Choksey Shares and Securities, said.

Observers say that the stock valuation of these companies will change either in expectations of foreign investment coming into the company or a change in the outlook on future demand, which is very uncertain now.

Of the 86 manufacturing sectors classified in the stock exchange, 76 are currently traded at a P/E of below 10. Of this, 54 are quoting at a ratio of 5 or lower.

The only sector to have bucked the trend in the last six years was petrochemicals, reporting a rise in the P/E during the last six years.

The sector traded at a P/E of 15.48 and managed a 16.5 per cent CAGR in net profit over the last six years. Reliance Industries, which dominates the sector, has a P/E of 15.6.

Similarly, pharmaceuticals managed a 22.1 per cent CAGR in bottomline, and yet its market capitalisation increased 11.7 per cent during the same period. Morepen Laboratories is traded at a P/E of 12 despite a bottomline CAGR of 44.1.

Rhone Poulenc is discounted at a below sector average P/E of 7.33, whereas Cipla is traded at a P/E of 33.6. Cipla managed a CAGR of 40 per cent in net profit and its market capitalisation increased at a CAGR of 30 per cent.

The private sector steel manufacturers have also managed to score a 12 per cent CAGR in net profit. However, its market capitalisation slipped over 24 per cent in the last six years. This has seen the sector getting a measly discount of 2.70 times.

Indeed, one of the surprising facets of market dynamics is the low discounting for the personal care sector, where the perception of demand slowdown has resulted in a P/E of 11.9.

The demand slowdown is most pronounced in low purchases from rural areas. Despite the fact that the sector's net profit has increased at a CAGR of 27.2 per cent in past six years, the outlook looks grim in the future.

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