Mumbai: Valuations have been the buzzword on Dalal Street for a while, but it’s suddenly gaining traction. Today, every conversation starts with the P/E ratio (price-to-earnings ratio, which compares the current price of the stock to its earnings per share) and ends with a loud statement that valuations look “a little stretched.”

However, many experts believe that looking at an isolated ratio will not help investors understand the realities of the market and a higher valuation may not be the only deciding factor driving the market.

Valuations are important in the long term, but need not have an impact in the short term. This is because there is never a proper valuation for a stock as it is a very individual decision,” said Mukesh Dedhia, director of Ghalla & Bhansali Securities.

For example, a stock with a higher P/E may move further because there is more demand for the stock due to the higher profit opportunity. So there is always some confusion about the correct valuation,” he adds.

”When you look at the broader market, it’s hard to get a value pick. But if you use a bottom-up approach, you would still find many stocks in the market with the right valuation,” said Rajiv Thakkar, CEO of Parag Parikh Financial Advisory Services. While he’s a big believer in value investing, he says just looking at a ratio isn’t the right way to invest in a stock.

“There are many things you have to take into account. For example, you need to find out whether the growth rate is sustainable or how much capital is needed to sustain growth. Sometimes there is volume growth, but margins can come under pressure. There are many things to consider, just looking at a ratio is not enough,” he adds.

Some experts also believe that the higher valuations could be justified if foreign investors continue to pump money into the stock market in hopes of better performance from Indian companies.

“Current valuations do not justify India’s long-term growth potential. The market is trading at 17 times the earnings potential in 2011 and about 13.8 times the earnings forecast for 2012. In fact, it has a premium of about 50% for other emerging markets and about 25% premium for other global markets,” said Devendra Nevgi, Founder and lead partner, Delta Global Partners. He believes the premium is justifiable if foreign investors continue to bet on Indian equities.

This post ‘Don’t just bank on price-earnings ratio’

was original published at “”