Stock markets are supposed to look into the future while valuing companies.
Those with brighter growth prospects are supposed to enjoy better PE ratios while those with bleaker prospects usually trade at lower valuations. However, markets in the past year seem to have focussed only on the here and now.
The past year has seen companies grapple with multiple problems. Material prices spiralled, interest costs shot up, the rupee fell sharply — all of which led to an earnings squeeze even as sales held strong.
The collective net profits of the BSE 500 companies fell 10 per cent even as net revenues clocked a 26 per cent growth in the first half of this fiscal over the same period last year.
Held up by growth
Companies that managed to deliver growth in earnings for the first six months of this fiscal over the year-ago period managed to keep their valuations above that of broader markets.
The converse also holds; those that saw earnings decline in this fiscal were dealt a punishing hand by markets.
Considering those companies in the BSE 500 universe that currently trade at PE multiples higher than the 16.8 times of broader markets, more than half delivered on earnings growth in the first six months of this fiscal. Consumer durables player VIP Industries, for instance, saw net profits for the half-year ended September '11 grow by 15 per cent over the same period last year.
The stock's valuations, at 18 times, have stayed superior to that of the broader market.
Similarly, Titan Industries' 39 per cent growth, even as it battled high gold prices, helped the company continue to command high valuations.
Earnings decline weighs
Companies that saw a fall in earnings were consequently punished, with more than half the stocks seeing valuations drop sharply from the levels last December, and languish below that of broader markets.
For instance, Whirlpool India, also a durables maker, saw its once-superior valuations of 22 times of last December fall to 16 times now to trade just below the market average.
The company saw net profits slide 31 per cent in the half-year ended September '11.