Sensex – An analysis of historical valuations


I was playing around with the historical data of Sensex and its valuations (available from BSE website).I took the monthly data from Jan 1991 to September 2012 (261 data points). A basic analysis of the data points:

PE Multiple percentile range (For e.g. In 70% of the instances, the PE ratio was above 16.4):

PE Multiple Percentile Range
Lowest (Oct’98)           10.3
10th Percentile           13.5
20th Percentile           15.2
30th Percentile           16.4
40th Percentile           17.6
50th Percentile           18.8
60th Percentile           20.1
70th Percentile           21.6
80th Percentile           24.3
90th Percentile           32.2
Highest (Apr’92)           52.6

PB Multiple percentile range (For e.g. In 80% of the instances, the PB ratio was above 2.6):

PB Multiple Percentile Range
Lowest (Oct’98)             1.7
10th Percentile             2.3
20th Percentile             2.6
30th Percentile             2.9
40th Percentile             3.3
50th Percentile             3.5
60th Percentile             3.7
70th Percentile             4.1
80th Percentile             4.7
90th Percentile             5.4
Highest (Apr’92)             9.4

At present (23/11/2012) the Sensex PE multiple is 16.84 and PB Ratio is 2.86 – The PE valuation has been greater than 16.84 in 65% of the instances (171/261 months) and PB ratio has been greater than 2.86 in 71% of the instances (185/261). The odds are slightly in our favour and the market appears to be slightly undervalued compared to historical valuations.

Another point to note is that usually only PE ratio is focused upon in the general media and PB ratio is ignored. But the PB ratio is an important indicator too. The ROE for the Sensex can be computed by (PB Ratio/PE Ratio) for a given month. There have been occasions when the PE multiple is depressed and even the ROE is low (which can be the case when the interest rates are high since larger portion of the earnings is shared with debt holders as interest). When the tide turns, the ROE also improves and the PE multiple also expands. The impact of both these can be seen in the PB ratio. I would hazard a guess that since the ROE at present is lower than historical average, valuation based on PB ratio shows that we are further down in the cheaper territory compared to the valuation based on PE ratio.



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