Looking at the valuation of various sectors in India using trailing PE ratio, PB ratio and dividend yield
The valuation of the Indian market is a hot topic. Our previous article showed that larger caps offer better value than small and mid-caps, while momentum styles are pricier. In this article, we examine sector-specific valuations, noting significant differences across sectors. Even when the market is expensive, some sectors remain undervalued, and vice versa.
Snapshot of valuation of Indian indices
We examined the current Price-to-Earnings (PE) ratio, Price-to-Book (PB) ratio, and dividend yield, as well as their historical averages and percentile values. A lower percentile value for the PE ratio and PB ratio indicates a more attractive valuation of the sector. Conversely, for the dividend yield percentile, a higher value signifies a better valuation. Further, a cheaper valuation does not automatically mean better future performance. There could be valid reasons behind the cheaper valuation of a sector. However, this is a good starting point to think about where the opportunities are more likely to present themselves. With this in mind, we observe that:
- Without going into the reason behind a particular valuation, it does appear that valuation of banking and financial services is quite attractive.
- Within this segment, private sector banks are available at the best valuation. At sector level, they are available at below average PE ratio and PB ratio and offer above average dividend yield. This indicates their valuation is relatively attractive across all the three parameters.
- Further, only banking and financial services are more attractively valued than NIFTY 50 index. All other sectors are more expensive than NIFTY 50.
- On the other hand, it appears that consumption and CPSE segment is very expensive.
- Among sectors that export and may be more competitive due to rupee depreciation, pharma offers better value than IT.
- Despite their long-term below average return, FMCG sector are trading at a premium on PE basis. Though they offer above average dividend
Digging deeper into the performance and valuation of banking sector
The performance of the banking sector has been notably poor, significantly underperforming the NIFTY index. Examination of the rolling 5-year CAGR and rolling 10-year CAGR reveals that the trailing returns are considerably lower than the historical average. This trend is also evident when considering the PB ratio of the index, which has declined substantially below the long-term average.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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