Valuations of blue chip shares hit 3-year low, tread with caution say advisories

Even as the valuation of Indian blue-chip shares might have hit a three-year low, advisories are warning the investors to tread with caution because the earnings of the companies are also likely to be hit in the coming months.

As equities in India are witnessing an unprecedented meltdown, the valuation has gotten lower.

As of date, for every rupee of earning of Sensex companies, an investor is shelling out Rs 20.91 in March -- a number which is denoted by the price-equity ratio of the index.

This is a reduction of 15% from Rs 24.64 per Re 1 of earnings, in just 15 days. This is also a 25% correction since its peak of Rs 27.95 in December 2019.

According to Buffet’s indicator, a tool that measures investor wealth as part of the national income, India Inc’s valuation is at a rare sweet spot.The ratio for India stands at 81% now, right in the mid-range of 75%-95% range for fairly valued markets. Any huge correction in the coming days, which according to various brokerages, is on cards, will push Indian equities into the undervalued zone.

At its peak in January, the ratio stood at 115% -- the borderline for stocks being significantly overvalued.

However, despite valuations getting more realistic, the analysts have a word of caution for the investor -- only pick the top companies in benchmark indices.

“See these numbers of valuation have been there because of a dip in the share prices. But going forth, there is likely to be a hit on earnings of the companies because of lockdown. So it will nullify the impact of the dip in the share price,” said Siddharth Khemka of Motilal Oswal.

The consensus among the five analysts on Dalal Street that DH spoke to estimate a hit of at least 15% in the earnings of India Inc in the coming quarters. India Inc has already been under pressure as the earnings have been muted in the past three years.