Going purely by PE multiple or price-to-earnings ratio, which tells you how many years it will take for the company's earnings to cover its current price, Zomato is one of the most expensive stocks on Dalal Street with an astronomically high PE of 487x. The multibagger stock continues to attract buyers despite a 200%-plus rally in the last one year.
An analysis of profit-making companies with a market capitalisation of over Rs 1,000 crore shows that there are at least 8 stocks trading above 100 TTM PE multiples and have still given multibagger returns in one year. Besides Zomato, the list also includes CarTrade Tech, Olectra Greentech, Waaree Renewable Technologies, JBM Auto, ABB India, Trent and Godrej Properties.
Solar EPC player Waaree Renewable Technologies, whose parent company Waaree Energies has filed for IPO, was trading at a TTM PE of 171 but the smallcap stock has still given a mouthwatering return of over 1,147% in the last one year.
PE is considered as one of the important parameters to find out the attractiveness of investment. Generally, a low PE stock may indicate relatively cheaper valuations while a high PE stock may seem too expensive to buy.
If the starting valuations are high, are returns more likely to be modest in the near term?
“Our sense is that a high PE stock will not necessarily translate into modest or sub-par returns in the near term. We believe that the headroom for earnings growth along with earnings predictability and sustainability are the important factors that result in premium valuation on the PE metrics front,” Manish Chowdhury, Head of Research of StoxBox, told ETMarkets.
While PE may be one of the more popular valuation indicators, it should not be considered as the sole criteria for decision making simply because it doesn't factor in the future prospects and cash flows of the company.
“If the future growth of a company is much brighter, even a high PE stock can also provide decent returns whereas a high PE stock with lower growth prospects or volatile earnings can provide subdued returns over a period of time. Therefore, it is important to consider other fundamental parameters and future growth possibilities as well while choosing a high PE stock for investment," said Anooshka Soham Bathwal, CEO and Founder, Dhanvesttor.
In cases where future growth may be much higher, the Discounted Cash Flow (DCF) model can be a more appropriate decision making tool for investors.
“We would also advise investors to apply valuation metrics such as EV/EBITDA, P/B and EV/Sales depending upon sectors and not limit themselves to PE only. A superior metric than PE would be PEG as it offers an additional advantage of capturing earnings growth expectations into the overall picture,” Chowdhury said.
What looks expensive today may remain expensive later on as well but only if investors are willing to pay that much for the growth outlook.
(Data: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
(You can now subscribe to our ETMarkets WhatsApp channel)
