P/e ratios look up as markets soar and earnings lag - Views on News from Equitymaster

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  • Feb 29, 2000 - P/e ratios look up as markets soar and earnings lag

P/e ratios look up as markets soar and earnings lag

Feb 29, 2000

According to the Economic Survey the market capitalisation of the Bombay Stock Exchange (BSE) increased by 65% Rs 8 trillion between April and December 1999.

The Survey highlights two key factors to reflect on the increase in secondary market activity.

First, the average daily turnover on the two national stock exchanges (BSE and NSE) jumped nearly 100% during the period under consideration to Rs 80 bn. And second, net FII inflows amounted to US$ 1.3 bn, as compared to an outflow of US$ 540 m in the corresponding period last year.

During the nine months ended 31st December 1999 two interesting developments took place. First, there was a marked rise in the price to earnings ratio of the BSE Sensex. The p/e ratio increased from a low of 9.83 in October 1998 to 20.9 in December 1999. The surge in the ratio could be attributed to the sharp rise in the market indices and the slower growth in the earnings of corporates. What is of interest to note is that the rise in the markets took place despite international turmoil (Brazil 1999), war at Kargil and general elections. Not to add the deteriorating financial health of the central and state governments and the poor results turned out by corporate India for 3QFY00.

The second interesting development pertains to the sharp decline in delivery based trading. On the BSE delivery based trading accounts for only 25% of overall turnover, while on the NSE the corresponding figure stands at a dismal 9%. Whether this marks a rise in speculative activity cannot be said and even the Economic Survey has refrained from commenting on this.

However it needs to be mentioned that the dematerialisation initiative of the Sebi seems to have been successful. On the NSE, which has a depository, 76% of the delivery-based trades were settled in demat form. On the BSE however the figure was a pathetic 1.3%. The BSE can be expected to fare better once its own depository gets off the ground.

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