look news india
Mumbai: Leading broking house Kotak Institutional Equities has expressed concern over the valuations of many companies in India and warned that the valuations of many companies cannot be sustained. The broking house believes that shares of many companies are currently trading at exceptionally high P/E multiples, which valuations cannot sustain.
According to Kotak Institutional Equity, 104 companies are trading at a multiple of more than 50, while 9 companies are trading at a price-to-earnings-P/E of more than 100. A company with a P/E multiple of 100 would need 83,000 times its earnings in 100 years to justify the current multiple. Many of these companies with high P/Es are in their traditional sectors and these companies may face many disruption risks.
Kotak Institutional Equities took a broader look at the Indian stock market, resulting in higher stock prices. In which the lack of connection between valuation methods and fundamentals has made high multiples—high P/Es—acceptable despite the aggressive effects of the underlying parameters. In addition to new companies and industries, there are a large number of high P/E companies. According to Kotak's DCF model such companies would need strong and consistent growth rates to justify their high P/E.
Companies will need faster and higher growth rates in the short term to justify very high P/Es. A 100 multiple P/E company, which may be in a growth phase over the next 40 years, has an earnings CAGR of more than 20 percent. A CAGR of 9 per cent will be required over the next 20 years and in the next 20 years, if the growth phase of the industry is reduced by 20 years, the required growth rate will be even higher.
Even if we assume stable market structure and stable profitability, a particular sector would require 200 multiple in the first scenario and 30 multiple in the second scenario, Kotak Equities said in its latest note, adding that only a few sunrise sectors can make it. Can pass short test.
