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Relative Valuation A Sectoral View for Indian Capital Market

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DOI: 10.1177/0258042X13484833

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Article

Relative Valuation Management and Labour Studies

37(3) 179–193
© 2012 XLRI Jamshedpur, School of
A Sectoral View for Indian Business Management
Capital Market & Human Resources
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/0258042X13484833
Asheesh Pandey http://mls.sagepub.com

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Abstract
In this paper we studied the sectoral behavior of Indian capital market through relative valuation for a

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period over a period of 21 years. The period covered under the study is from 1990–2010. The study
has been done both for a total period (1990–2010) and three sub-periods, viz. 1990–96, 1997–2003,

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2004–10. The research finds that price multiple distributions tend to be non-normal prior to 2003. On

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post-2003 basis these sample distributions are approximately normal, thereby implying that mean and

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standard deviations are relevant descriptive statistic measures in the Indian context, for a more recent
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period. The study also finds that we cannot judge all the sectors by classifying them with single high or
low price multiples. Different sectors tend to have different high and low multiples which stand true
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both for total period as well as for sub-periods.

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Keywords
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Price to Earnings, Relative Valuation, Price Multiples, Equity Valuation

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Introduction
Every asset, whether financial or real, has a value. To successfully invest and manage these assets, one
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should know not only what the value is but also the sources of the value. There are different techniques
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which are used for equity valuation. Few of the prominent techniques of equity valuation are: Discounted
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Cashflow (DCF) Models, Relative Valuations or Price Multiples like price to earnings ratio and price to
book value ratio, etc., Technical Analysis and Option Pricing Models. However, relative valuation is one
of the prominent tools being used by equity analysts in valuing shares. It is done on how similar assets
are priced in the market. It is widely accepted and used by all market participants due to the ease with
which valuation could be done under this method and also it is easy to present to clients.
The four major price multiples which are used in relative valuation for valuing equity are: Price to
Earnings (P/E), Price to Cashflow (P/CF), Price to Book Value (P/BV) and Price to Sales (P/S). Some
of the analysts use various variants of these four price multiples like using trailing P/E instead of using
current P/E or using Tobin’s Q instead of P/BV, etc.
A lot of empirical work has been done for matured markets relating to the robustness of value
drivers in deriving equity prices. Beaver, Lambert and Morse (1980) did one of the earliest work on
180 Asheesh Pandey

value drivers. The study derived a relationship between price changes and earnings changes by expand-
ing the information upon which earnings expectations are conditioned to include data other than prior
earnings history. In the same league Ou and Penman (1989) show that the information in prices that leads
to future earnings is contained in financial statements. Skogsvik and Skogsvik (2001) investigate P/E
ratio valuation as a relative valuation approach. More specifically, they investigate how similar the
company being valued and its peer companies have to be, in order for a relative P/E ratio valuation
model to work. Liu, Nissim and Thomas (2002) did the most rigorous research on relative valuations in
their research paper to examine the valuation performance of a comprehensive list of value drivers to
find out which value driver best explains the stock prices. They extend their work in 2005 to compare the
valuations based on cash flow versus earnings multiples.
Small body of literature on price multiples is also available in the Indian context. Gupta, Jain and
Gupta (1998) study an empirical perspective on P/E ratios. The focus of the research is on the market’s

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average P/E ratio and its use as an important market signal. Besides, it also advocates a new approach
about how to evaluate the appropriate level of P/E ratio as a part of investment analysis of individual

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companies. They also examine the short-term volatility of the market’s P/E ratio, reflecting the possible

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irrationality of the market from time to time. The research is concerned with drawing implications of

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findings for regulatory policy and market reform. Suveera Gill (2003) demonstrates empirically that the
stock market valuations are no longer driven solely by traditional investment principles. Since only a
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small piece of literature is available in the Indian research, there is a need to undertake research on
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the subject. Majority of the Indian researchers have paid attention to P/E ratios while no exhaustive
research has been done on other multiples like P/BV, P/S and P/CF in India. Further, there is no empirical
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evidence on the relationship between price multiples and their fundamental determinants. Present
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study attempts to fill the research gap on the subject and contribute to the body of literature relating to
equity valuations.
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The study has been done with the objective to find out how price multiples have fared over time for
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different sectors in the Indian capital market.

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The study is organized into five sections. The second section presents a brief review of literature; third
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section depicts the data and their sources. Sectoral analysis of price multiples is discussed in the fourth
section. Last section deals with summary and conclusion.
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Review of Literature
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Lot of information is available in texts (e.g., Copeland, Koller and Murrin, 1994; Damodaran, 1996;
Palepu, Healey and Bernard, 2001) related to relative valuation. However, there are few papers pub-
lished in the area. The research in the international arena has been done on all the price multiples, on the
other hand the Indian research is limited to the P/E multiple.
One of the earliest international work on value drivers was done by Beaver, Lambert and Morse
(1980). In the analysis, price is used as a surrogate for additional information available to market par-
ticipants using the stochastic process of accounting earnings. This relationship provides an interpretation
of the contemporaneous association between price changes and earnings changes, as previously observed
by Ball and Brown (1968) and Beaver, Clarke and Wright (1979) among others. It also provides a basis
for inferring from prices the earnings process and the expected future earnings as perceived by market

Management and Labour Studies, 37, 3 (2012): 179–193

A Sectoral View for Indian Capital Market 181

participants. In the same league Ou and Penman (1989) examined that information in prices that leads to
future earnings is contained in financial statements. The study compares the ability of prices and appro-
priate financial statement variables to predict future earnings. In addition to comparing the ability of P/E
ratio and accounting numbers to predict earnings, it also compares the ability to predict stock returns. It
demonstrates that certain numbers presented in the income statement, balance sheet and cash flows can
be summarized into one measure that predicts future earnings and also filters out transitory components
of current earnings. Skogsvik and Skogsvik (2001) investigate P/E ratio valuation as a relative valuation
approach. The analysis shows that P/E ratio is a function of four company characteristics: expected book
return on owner’s equity, growth in owner’s equity, the company dividend payout ratio and the cost of
equity capital. It also finds that P/E ratio of the peer company is unlikely to be correct in assessing the
value of the concerned company when there are differences in the expected book return on owner’s
equity. Lastly it suggests that peer company should really be similar to the company being valued with

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regard to the investment risk, the choice of accounting principles, the expected future book return on
owner’s equity and the future growth in owner’s equity. Liu, Nissim and Thomas (2002a) observe the

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valuation performance of exhaustive list of price multiples to find out the best among them. They find

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out that multiples derived from forward earnings explain stock prices remarkably well as the pricing

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errors were within 15 per cent of stock prices for about half of their sample. In terms of relative perform-
ance the following general rankings are observed consistently each year: forward P/E multiples are foll-
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owed by historical P/E multiples, P/CF and P/BV have a tie for third place, and P/S is the worst
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performer. They also observe that performance declines when they consider more complex measures of
intrinsic value based on shortcut residual income models. They also observe that contrary to popular
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view that different industries have different ‘best’multiples; these overall rankings are observed consist-
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ently for almost all industries examined. In addition they also find that performance improves when
multiples are computed using harmonic mean relative to mean or median ratio of price to value driver of
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comparable firms. Liu, Nissim and Thomas (2002b) expand their previous work over different countries.
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In this paper they evaluate the efficiency of price multiples in forecasting prices for 10 countries. The
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multiples investigated are reported and forecasted numbers for P/E, P/CF and P/S. The results are almost
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similar to their previous work. The latest work again has been done by Liu, Nissim and Thomas (2005)
in investigating if P/CF multiple is superior to P/E multiple. They find that in contrast to claims that
cash flows are better than earnings as a measure of value, stock prices are better forecasted by reported
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earnings than reported operating cash flows.

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In India also some work has been done on price multiples; however, it has been restricted to P/E
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ratios. Gupta, Jain and Gupta (1998) study P/E ratios of the Indian stock market and Indian companies.
The analysis provides an empirical perspective on P/E ratios. The focus of the study is on the market’s
average P/E ratio and its use as an important market signal. Besides, it also advocates a new approach
about how to evaluate the appropriate level of P/E ratio as part of investment analysis of individual com-
panies. They also examine the short-term volatility of the market’s P/E ratio, reflecting the possible
irrationality of the market from time to time. Through their analysis they find that the decade of 1980s
witnessed a long-term revaluation of the Indian stock market as a whole. The market’s average P/E ratio
doubled between 1980 and 1986, which reflected a significant shift in the household investor’s asset
preference towards equities. They also observe that the market’s P/E ratio is an extremely useful indica-
tor of the market’s mood and state. The research analyzes that from the practical angle there are four
states of the stock market, each state being associated with a certain level of the market’s average P/E

Management and Labour Studies, 37, 3 (2012): 179–193

182 Asheesh Pandey

ratio. The states are: dangerously high average P/E ratio which is a symptom of market bubble; high
market P/E ratio where extreme caution is needed in entering into the market; reasonable market P/E
ratio which prevails in developed and efficient markets; and abnormally low which offers a rare oppor-
tunity of buying a stock at advantageous price. The study also analyzes short-term movements of the
market’s average P/E ratio and concludes that the Indian market had a character of ‘bubble market’ and
not a market governed essentially by economic fundamentals. The research indicates that the market’s
unhealthy functioning should be a matter of concern for policymakers and greater reliance should be
placed on markets. The study shows the erratic behavior in the Indian market’s average P/E ratio which
fluctuated between a high level of 40 in 1991 to 10.5 in 1996. The market’s erratic behavior was also
indicated by the within share price fluctuations whose high to low ratio on an average was as high as
2.5:1. They examine that the primary determinant of the return earned from equity investment is the
change in P/E ratio rather than EPS growth. Lastly the study indicates that despite the creation of OTCEI,

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no satisfactory trading arrangements for small company shares have been evolved in India, which is an
important area of concern for policy makers. Gill (2003) shows empirically that traditional investment

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principles no longer govern the stcok market valuations. The study establishes empirically that the stock

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market valuations are no longer driven solely by traditional investment principles. It tests three proposi-

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tions: (i) The P/E ratio companies give superior returns. (ii) The average P/E ratio for an industry gives
an indication of the overall expectation for that particular segment. (iii) The relevance of growth in earn-
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ings to the P/E ratio. Since there are ‘acceptable P/E ranges’ for different industries it is not only the past
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record of the P/E ratio but also the average P/E ratio for the industry which should be looked into. Lastly
she observes that the use of P/E ratio along with the EPS growth rate could produce the more useful PEG
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ratio, which is a sound indicator of a company’s potential value. Pandey (2012) evaluates which of the
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price multiple between the P/E and P/S better explains the stock price. He observes that both for a total
time period of over 20 years and two sub-periods of 10 year each, P/E clearly outperforms P/S ratio.
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Data
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The sectoral analysis of price multiples has been done for 17 major sectors. The sector classification of
Bombay Stock Exchange 500 (BSE 500) index has been used for the purpose. For each sector yearly data
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of around 12 large cap companies is selected for a period of 21 years with positive value drivers for each
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company. The period covered under the study is from 1990 to 2010.We cover 162 companies which
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account for a major part of market capitalization as well as trading activity in India. The data details are
provided in Exhibit 1. The data comprising of yearly multiples, viz. P/E, P/S, P/BV and P/CF has been
taken from Capitaline Plus. All the companies with financial year ending in March have been considered.
All the multiples have been capped between 0 and 100 to avoid extremely large as well as negative values.

Sectoral Analysis of Price Multiples

We analyze the behaviour of price multiples for 17 prominent sectors over a period of 21 years using
descriptive statistic. We employ two measures of central tendency, that is, mean and median and employ

Management and Labour Studies, 37, 3 (2012): 179–193

A Sectoral View for Indian Capital Market 183

Exhibit 1

S. No. Sector No. of Companies

 1 Agriculture 11
 2 Capital Goods 12
 3 Chemical & Petrochemical 11
 4 Consumer Durables  4
 5 Finance 12
 6 FMCG 12
 7 Healthcare 12
 8 Housing Related 12
 9 Information Technology 11
10 Metal, Metal Products & Mining 12

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11 Oil & Gas 12
12 Power  6
13 Telecom  4

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14 Textile  8
15 Tourism  4

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16 Transport Equipment 12

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17 Transport Services  7

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range and standard deviation as a measure of dispersion. The mean-standard deviation framework shall
be relevant for analysis only if the underlying distributions of price multiples tend to be normal. However,
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inherent biases in the construction of these price multiples and the data cleaning exercises can cause
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these financial time series sometimes to be positively skewed. The median-range framework becomes
more relevant under these conditions. We evaluate the normality of price multiple distributions by using
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standard test of skewness and kurtosis. To capture symmetry, our skewness measure is r1 which is a
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square root of β1 where,

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β1 = (µ3)2/(µ2)3.
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We gauge pekedness of the underlying distribution by estimating r2 as a measure of excess kurtosis where
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r2 is b2 – 3, and where,
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β2 = µ4/(µ2)2

where, µj is the jth movement around mean. Significant values of r1 and r2 (at a given level of significance,
say 5 per cent) shall employ non-normal distribution properties.
The estimation has been done for four price multiples namely P/E ratios, P/BV ratios, P/CF ratios and
P/S ratios. We perform our analysis for total period (1990–2010) as well as for three sub-periods i.e. sub
period1 (1990–96), sub-period 2 (1997–2003) and sub-period 3 (2004–10). We estimate descriptive
statistics for the sample companies using year-end price multiples. Subsequently, we obtain similar
information at sector level by taking the average of each descriptive statistic for the sample companies
belonging to each sector. The descriptive statistics for the specified sector relating to sectors relating to
P/E ratios, P/BV ratios, P/CF ratios and P/S ratios are given in Tables 1–4 respectively.

Management and Labour Studies, 37, 3 (2012): 179–193

184 Asheesh Pandey

Table 1. Sectoral Behavior of Price/Earnings Ratios

Panel I: Total Period (1990–2010)

Standard
S. No. Sector Mean Median Deviation Kurtosis Skewness Range
 1 Agriculture 10.83 7.48 11.86 4.66 1.88 41.45
 2 Capital Goods 16.82 11.56 16.76 5.40 2.07 62.72
 3 Chemical & Petrochemical 16.44 12.17 15.00 4.19 1.90 54.29
 4 Consumer Durables 15.39 11.73 10.44 0.90 1.23 36.79
 5 Finance 15.84 11.42 14.07 3.60 1.62 47.97
 6 FMCG 22.07 17.38 15.23 2.16 1.40 52.50
 7 Healthcare 20.03 15.58 15.84 2.23 1.44 53.39
 8 Housing Related 17.72 11.42 16.61 3.21 1.77 54.48

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 9 Information Technology 30.06 20.95 23.87 2.53 1.50 76.58
10 Metal, Metal Products & Mining 12.92 9.24 12.22 3.86 1.73 43.55

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11 Oil & Gas 17.52 13.08 16.14 2.85 1.56 54.62
12 Power 12.58 8.95 12.71 7.07 2.36 48.32

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13 Telecom 15.61 13.38 13.34 3.83 1.68 49.08

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14 Textile 13.41 10.16 10.65 2.69 1.48 39.87
15 Tourism 24.76 18.46 20.74 4.93 1.97 77.39
16 Transport Equipment 18.44 14.29
C 13.26 3.79 1.75 47.28
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17 Transport Services 8.21 6.02 7.52 4.61 1.88 25.89
Panel II: Sub Period 1 (1990–96)
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Standard
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S. No. Sector Mean Median Deviation Kurtosis Skewness Range

 1 Agriculture 21.03 14.89 22.42 0.08 1.09 36.04
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 2 Capital Goods 26.69 21.08 22.07 1.41 1.25 42.68

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 3 Chemical & Petrochemical 20.66 16.88 12.89 2.00 1.37 29.51

 4 Consumer Durables 16.79 14.93 8.35 2.01 1.53 10.74
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 5 Finance 25.32 17.19 24.48 3.25 1.06 26.92

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 6 FMCG 33.73 31.28 23.44 1.46 0.83 35.28

 7 Healthcare 24.86 23.35 22.50 1.49 0.73 23.36
 8 Housing Related 19.54 16.84 12.21 0.77 0.43 25.71
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 9 Information Technology 36.92 33.73 17.69 –2.08 0.31 17.30

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10 Metal, Metal Products & Mining 19.09 14.85 16.44 2.16 1.41 24.34
11 Oil & Gas 17.52 13.08 16.14 2.85 1.56 54.62
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12 Power 17.68 14.45 15.35 3.55 0.95 23.84

13 Telecom 23.77 22.78 13.43 –1.78 0.43 23.28
14 Textile 15.82 14.58 7.03 –0.01 0.30 17.15
15 Tourism 27.32 22.17 17.31 0.88 1.13 40.45
16 Transport Equipment 25.10 21.30 16.43 –0.44 0.87 38.98
17 Transport Services 9.34 8.84 5.07 3.51 0.86 7.68
(Table 1 continued)

Management and Labour Studies, 37, 3 (2012): 179–193

A Sectoral View for Indian Capital Market 185

(Table 1 continued)
Panel III: Sub-period 2 (1997–03)
Standard
S. No. Sector Mean Median Deviation Kurtosis Skewness Range
 1 Agriculture 5.49 4.90 3.06 –0.16 0.40 6.51
 2 Capital Goods 12.53 8.95 11.01 2.14 1.31 26.37
 3 Chemical & Petrochemical 14.61 11.50 11.46 0.98 0.81 26.16
 4 Consumer Durables 10.52 10.09 4.97 –0.40 0.58 11.68
 5 Finance 10.52 9.42 6.00 0.87 0.70 14.63
 6 FMCG 21.64 20.14 11.59 1.43 1.13 24.79
 7 Healthcare 16.67 13.36 11.23 2.04 1.29 28.88
 8 Housing Related 11.65 10.28 8.02 2.05 1.30 16.56

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 9 Information Technology 35.35 28.64 29.69 1.08 1.10 67.17
10 Metal, Metal Products & Mining 10.98 8.50 8.38 1.58 0.98 20.11
11 Oil & Gas 12.00 11.46 9.79 –0.85 0.61 20.70

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12 Power 11.38 7.29 11.05 1.35 1.12 25.27
13 Telecom 14.67 10.96 13.61 0.50 0.52 33.84

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14 Textile 11.71 8.56 11.12 3.13 1.57 28.71

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15 Tourism 12.62 12.36 4.85 –0.95 0.57 11.80

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16 Transport Equipment 14.79 13.55 7.23 0.59 0.74 18.36
17 Transport Services 6.31 4.73 5.43 0.15 1.05 13.23
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Panel IV: Sub-period 3 (2004–10)
Standard
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S. No. Sector Mean Median Deviation Kurtosis Skewness Range

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 1 Agriculture 9.17 9.05 5.03 1.32 0.34 12.44

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 2 Capital Goods 15.35 13.51 9.72 –1.03 0.59 22.80

 3 Chemical & Petrochemical 14.04 11.09 10.17 0.11 0.83 24.37
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 4 Consumer Durables 21.49 18.61 12.74 –0.86 0.69 33.06

 5 Finance
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17.94 16.28 10.82 –1.08 0.20 26.05

 6 FMCG 18.08 15.43 10.74 0.21 0.89 25.87
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 7 Healthcare 22.15 20.46 12.83 –0.63 0.37 31.43

 8 Housing Related 22.53 20.58 17.71 –0.90 0.16 39.31
 9 Information Technology 25.78 22.28 12.96 0.63 0.97 33.05
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10 Metal, Metal Products & Mining 9.61 9.06 5.17 0.41 0.64 13.18
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11 Oil & Gas 16.24 10.60 16.01 1.65 0.78 37.74

12 Power 11.54 11.26 5.67 0.48 0.44 14.85
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13 Telecom 12.47 11.07 7.06 –0.91 0.63 16.61

14 Textile 13.83 12.60 9.92 –0.73 0.69 23.53
15 Tourism 35.50 33.00 22.71 0.73 0.42 58.65
16 Transport Equipment 16.80 15.88 8.15 0.18 0.36 19.66
17 Transport Services 8.54 6.84 6.93 1.54 1.01 18.36

Management and Labour Studies, 37, 3 (2012): 179–193

186 Asheesh Pandey

Table 2. Sectoral Behavior of Price/Book Value Ratios

Panel I: Total Period (1990–2010)

S. No. Sector Mean Median S.D. Kurtosis Skewness Range
 1 Agriculture 1.58 1.02 1.59 5.25 2.15 6.09
 2 Capital Goods 3.14 1.70 4.90 5.87 2.24 19.42
 3 Chemical & Petrochemical 3.32 2.09 3.94 3.27 1.66 14.89
 4 Consumer Durables 2.65 1.87 2.38 1.22 1.36 8.38
 5 Finance 2.23 1.71 1.79 2.64 1.25 6.86
 6 FMCG 6.11 4.35 6.01 4.72 1.97 23.02
 7 Healthcare 4.48 2.80 4.91 3.80 1.73 19.07
 8 Housing Related 2.39 1.50 2.76 4.49 1.96 10.41
 9 Information Technology 7.36 4.89 8.62 5.91 2.23 32.72

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10 Metal, Metal Products & Mining 1.78 1.26 1.57 2.95 1.59 6.21
11 Oil & Gas 2.48 1.84 2.17 3.23 1.60 7.62

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12 Power 1.48 1.07 1.51 5.27 2.03 6.10
13 Telecom 2.44 1.55 2.56 3.82 1.93 9.69

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14 Textile 1.71 1.35 1.59 4.62 1.95 6.39

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15 Tourism 3.33 2.82 2.57 1.30 1.17 9.49
16 Transport Equipment 3.42 3.12 2.01 1.62 1.05 7.48
17 Transport Services 1.74 1.13
C 1.74 5.31 2.14 6.22
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Panel II: Sub-period 1 (1990–96)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range
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 1 Agriculture 2.72 2.11 1.99 3.16 1.75 4.81

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 2 Capital Goods 5.91 3.14 7.04 4.10 2.00 15.53

 3 Chemical & Petrochemical 7.87 7.60 7.61 0.27 0.99 12.55
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 4 Consumer Durables 3.05 2.49 2.49 0.09 1.04 3.58

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 5 Finance 4.03 2.88 3.60 2.61 1.14 4.45

 6 FMCG 9.06 8.22 4.72 1.37 1.06 8.59
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 7 Healthcare 6.24 4.17 8.99 2.33 1.19 11.09

 8 Housing Related 3.22 2.95 2.08 1.33 0.67 5.01
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 9 Information Technology 4.46 3.99 2.09 1.21 1.51 3.03

10 Metal, Metal Products & Mining 2.82 2.42 1.82 3.33 1.43 3.77
11 Oil & Gas 4.84 3.90 3.20 3.70 1.33 5.33
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12 Power 3.53 2.98 2.77 2.36 0.99 4.39

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13 Telecom 5.83 5.44 3.05 1.56 1.42 5.88

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14 Textile 3.18 2.74 1.99 1.43 1.26 5.09

15 Tourism 5.65 5.62 3.09 –0.09 0.30 8.19
16 Transport Equipment 4.33 3.83 1.98 0.62 0.91 5.40
17 Transport Services 2.42 2.09 1.52 2.69 1.71 2.36
Panel III: Sub-period 2 (1997–03)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range
 1 Agriculture 0.90 0.85 0.65 0.48 0.64 1.59
 2 Capital Goods 1.08 0.83 0.76 1.54 1.16 2.28
 3 Chemical & Petrochemical 1.77 1.70 0.72 0.08 0.54 2.24
 4 Consumer Durables 1.54 1.49 0.77 0.43 0.75 2.34
 5 Finance 1.46 1.32 0.64 –0.02 0.56 1.95
(Table 2 continued)

Management and Labour Studies, 37, 3 (2012): 179–193

A Sectoral View for Indian Capital Market 187

(Table 2 continued)
Panel III: Sub-period 2 (1997–03)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range
 6 FMCG 4.28 4.01 1.88 0.62 0.92 5.03
 7 Healthcare 3.52 2.64 2.86 2.15 1.12 7.71
 8 Housing Related 0.95 0.73 0.59 2.36 1.53 1.86
 9 Information Technology 11.94 8.19 13.35 1.33 1.33 32.33
10 Metal, Metal Products & Mining 0.92 0.78 0.53 1.44 1.22 1.75
11 Oil & Gas 1.43 1.28 0.74 –0.23 0.85 2.05
12 Power 0.93 0.86 0.46 –0.28 0.53 1.47
13 Telecom 2.21 1.66 1.97 1.92 1.20 5.44
14 Textile 0.81 0.67 0.50 1.50 1.36 1.65

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15 Tourism 2.21 1.85 1.49 –0.05 0.94 4.07
16 Transport Equipment 2.46 2.31 1.18 0.59 0.84 3.42
17 Transport Services 1.15 0.92 0.83 0.24 0.88 2.39

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Panel IV: Sub-period 3 (2004–10)

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S. No. Sector Mean Median S.D. Kurtosis Skewness Range

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 1 Agriculture 1.36 1.15 0.94 –0.42 0.69 2.47

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 2 Capital Goods 3.24 2.40 2.86 –0.77 0.82 7.21
 3 Chemical & Petrochemical 2.87 2.44 1.80 –0.17 0.51 4.80
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 4 Consumer Durables 3.67 2.67 3.23 –1.60 0.64 8.08
 5 Finance 2.43 2.35 1.29 –1.33 –0.06 3.48
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 6 FMCG 6.49 4.21 6.28 0.68 1.07 16.43

 7 Healthcare 4.19 4.12 2.07 –0.61 0.29 5.66
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 8 Housing Related 3.12 1.94 3.19 –0.10 0.83 8.26

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 9 Information Technology 5.02 4.82 1.55 –1.15 0.43 4.18

10 Metal, Metal Products & Mining 1.85 1.86 1.13 –0.71 0.23 3.15
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11 Oil & Gas 2.25 1.92 1.48 –1.17 0.30 3.70

12 Power 1.29 1.23 0.76 –1.05 0.29 2.22
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13 Telecom 1.10 0.82 0.73 –0.52 0.79 2.20

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14 Textile 1.45 1.36 1.03 –0.55 0.47 2.86

15 Tourism 2.44 2.16 1.64 –1.50 0.50 4.27
16 Transport Equipment 3.63 3.61 1.65 –0.88 0.12 4.18
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17 Transport Services 1.93 1.85 1.47 –1.10 0.22 3.61

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Table 3. Sectoral Behavior of Price/Cashflow Ratios

Panel I: Total Period (1990–2010)

S. No. Sector Mean Median S.D Kurtosis Skewness Range
 1 Agriculture 7.62 4.27 10.74 5.82 2.24 38.47
 2 Capital Goods 10.48 7.21 11.31 4.70 1.91 42.99
 3 Chemical & Petrochemical 10.33 8.34 7.28 2.97 1.63 26.51
 4 Consumer Durables 9.30 7.31 6.15 0.35 1.13 20.78
 5 Finance 13.37 9.25 12.16 3.05 1.53 42.44
 6 FMCG 17.79 14.52 11.89 1.95 1.43 42.80
(Table 3 continued)

Management and Labour Studies, 37, 3 (2012): 179–193

188 Asheesh Pandey

(Table 3 continued)
Panel I: Total Period (1990–2010)
S. No. Sector Mean Median S.D Kurtosis Skewness Range
 7 Healthcare 16.75 11.81 17.18 3.91 1.77 63.60
 8 Housing Related 9.27 5.75 9.17 2.48 1.66 31.50
 9 Information Technology 20.63 15.87 16.74 5.34 1.97 60.96
10 Metal, Metal Products & Mining 7.86 5.96 6.19 2.71 1.54 22.76
11 Oil & Gas 10.88 8.77 8.58 2.78 1.50 27.63
12 Power 6.55 5.01 6.28 4.56 1.81 24.89
13 Telecom 11.84 9.12 11.05 4.36 1.77 42.67
14 Textile 7.21 5.83 5.31 0.80 1.15 18.42
15 Tourism 15.34 13.04 10.94 4.23 1.48 43.19

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16 Transport Equipment 10.33 8.92 5.88 2.05 1.24 21.32
17 Transport Services 4.42 3.72 3.33 4.62 1.89 12.24

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Panel II: Sub-period 1 (1990–96)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range

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 1 Agriculture 16.29 9.96 18.50 0.71 1.17 34.53
 2 Capital Goods 16.82 11.14 16.17 2.66 1.53 33.83
 3 Chemical & Petrochemical 13.58
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12.08 6.90 2.51 1.47 17.16
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 4 Consumer Durables 11.51 10.24 4.95 0.22 1.15 6.55
 5 Finance 21.21 14.21 21.10 2.95 0.92 23.70
 6 FMCG 25.07 23.21 15.83 2.11 1.04 25.90
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 7 Healthcare 20.11 17.77 18.82 1.03 0.94 19.86

 8 Housing Related 9.44 9.48 4.94 –0.64 –0.05 10.63
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 9 Information Technology 17.28 16.40 7.61 0.86 0.54 8.19

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10 Metal, Metal Products & Mining 11.15 9.74 6.90 1.93 1.34 11.44
11 Oil & Gas 21.64 19.15 10.83 2.02 1.20 16.33
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12 Power 12.30 10.00 10.97 3.63 0.94 17.62

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13 Telecom 17.97 17.03 9.91 –1.41 0.52 18.14

14 Textile 9.75 8.79 4.37 –0.62 0.49 10.71
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15 Tourism 21.35 18.39 15.89 2.20 0.69 40.34

16 Transport Equipment 13.61 12.91 7.25 0.17 0.73 17.99
17 Transport Services 6.24 5.60 3.60 3.70 1.77 6.03
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Panel III: Sub-period 2 (1997–2003)

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S. No. Sector Mean Median S.D. Kurtosis Skewness Range

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 1 Agriculture 3.17 3.06 1.20 1.47 0.58 3.38

 2 Capital Goods 5.40 4.60 3.07 1.13 1.16 8.39
 3 Chemical & Petrochemical 7.54 7.45 3.11 –0.20 0.37 7.82
 4 Consumer Durables 6.49 6.12 2.52 –0.43 0.01 6.76
 5 Finance 8.38 7.50 4.35 0.95 0.53 11.34
 6 FMCG 17.64 15.72 9.11 0.49 0.88 20.03
 7 Healthcare 16.76 10.83 16.74 2.06 1.06 42.71
 8 Housing Related 5.53 4.73 2.51 1.41 0.90 6.36
 9 Information Technology 27.08 19.08 26.33 1.91 1.46 59.51
10 Metal, Metal Products & Mining 6.19 4.97 4.31 0.57 0.88 11.47
11 Oil & Gas 7.31 6.58 5.06 –0.55 0.76 11.55
(Table 3 continued)

Management and Labour Studies, 37, 3 (2012): 179–193

A Sectoral View for Indian Capital Market 189

(Table 3 continued)
Panel III: Sub-period 2 (1997–2003)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range
12 Power 4.60 4.25 2.46 –0.38 0.27 6.44
13 Telecom 12.49 8.59 12.66 0.36 0.53 31.91
14 Textile 4.14 3.79 2.01 –1.42 0.57 5.31
15 Tourism 9.25 9.07 2.93 –0.37 0.71 7.47
16 Transport Equipment 7.81 7.46 2.86 0.62 0.70 7.95
17 Transport Services 3.48 2.90 2.19 –0.55 0.81 5.70
Panel IV: Sub-period 3 (2004–10)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range

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 1 Agriculture 5.05 4.58 3.26 0.14 0.62 7.99
 2 Capital Goods 10.92 8.81 7.88 –0.75 0.78 19.49
 3 Chemical & Petrochemical 9.98 8.30 6.76 –0.32 0.67 16.68

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 4 Consumer Durables 11.64 10.02 8.13 –1.62 0.57 19.97
 5 Finance 15.68 13.76 9.54 –0.88 0.30 24.12

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 6 FMCG 14.49 12.46 8.21 –0.26 0.78 20.84

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 7 Healthcare 16.27 15.98 8.21 –1.12 0.26 20.46

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 8 Housing Related 12.08 7.68 11.05 –0.65 0.86 26.66
 9 Information Technology 17.58 16.50 5.03 –0.70 0.53 13.09
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10 Metal, Metal Products & Mining 7.00 6.63 3.66 –0.13 0.41 9.72
11 Oil & Gas 8.26 7.19 5.17 0.37 0.29 12.40
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12 Power 6.24 5.92 3.75 –0.65 0.48 9.99

13 Telecom 7.50 7.17 3.71 –0.94 0.14 9.10
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14 Textile 8.26 7.20 6.00 –0.60 0.76 15.29

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15 Tourism 16.27 16.48 6.35 –0.50 0.16 17.77

16 Transport Equipment 10.33 10.16 4.53 –1.00 0.05 11.05
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17 Transport Services 4.10 3.99 2.19 –1.24 0.04 5.76

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Table 4. Sectoral Behavior of Price/Sales Ratios

Panel I: Total Period (1990–2010)

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S. No. Sector Mean Median S.D. Kurtosis Skewness Range

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 1 Agriculture 0.80 0.43 1.16 6.69 2.42 4.35

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 2 Capital Goods 1.67 0.63 3.30 6.83 2.40 13.05

 3 Chemical & Petrochemical 1.11 0.69 1.28 2.44 1.46 4.57
 4 Consumer Durables 0.67 0.38 0.62 1.02 1.33 1.84
 5 Finance 3.83 2.30 4.26 1.83 1.18 15.74
 6 FMCG 1.59 1.21 1.14 1.80 1.44 3.68
 7 Healthcare 2.52 1.80 2.51 3.75 1.70 9.26
 8 Housing Related 1.55 0.53 3.02 4.18 1.88 11.32
 9 Information Technology 5.12 3.64 5.77 6.26 2.14 21.76
10 Metal, Metal Products & Mining 1.19 0.94 0.93 3.08 1.53 3.34
11 Oil & Gas 2.30 1.21 3.49 2.04 1.33 11.61
12 Power 1.44 1.17 1.36 4.08 1.76 4.92
(Table 4 continued)

Management and Labour Studies, 37, 3 (2012): 179–193

190 Asheesh Pandey

(Table 4 continued)
Panel I: Total Period (1990–2010)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range
13 Telecom 2.08 1.47 1.91 3.65 1.53 7.47
14 Textile 1.19 0.92 0.89 0.75 1.11 3.05
15 Tourism 3.45 2.85 1.96 0.93 0.84 6.41
16 Transport Equipment 1.01 0.86 0.62 1.53 1.02 2.10
17 Transport Services 1.70 1.08 1.82 3.54 1.72 6.03
Panel II: Sub-period 1 (1990–96)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range
 1 Agriculture 1.91 0.43 1.87 6.69 2.42 4.35

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 2 Capital Goods 3.83 0.63 5.60 6.83 2.40 13.05
 3 Chemical & Petrochemical 2.39 0.69 2.36 2.44 1.46 4.57
 4 Consumer Durables 1.44 0.38 0.45 1.02 1.33 1.84

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 5 Finance 6.90 2.30 6.50 1.83 1.18 15.74
 6 FMCG 2.08 1.21 0.96 1.80 1.44 3.68

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 7 Healthcare 3.18 1.80 4.30 3.75 1.70 9.26

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 8 Housing Related 1.03 0.53 0.63 4.18 1.88 11.32
 9
10
Information Technology
Metal, Metal Products & Mining
4.47
1.51
3.64
0.94 C 2.20
0.83
6.26
3.08
2.14
1.53
21.76
3.34
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11 Oil & Gas 1.96 1.21 1.57 2.04 1.33 11.61
12 Power 2.21 1.17 1.83 4.08 1.76 4.92
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13 Telecom 2.89 1.47 1.30 3.65 1.53 7.47

14 Textile 1.52 0.92 0.86 0.75 1.11 3.05
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15 Tourism 4.26 2.85 2.35 0.93 0.84 6.41

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16 Transport Equipment 1.14 0.86 0.60 1.53 1.02 2.10

17 Transport Services 2.85 1.08 1.30 3.54 1.72 6.03
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Panel III: Sub-period 2 (1997–03)

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S. No. Sector Mean Median S.D. Kurtosis Skewness Range

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 1 Agriculture 0.32 0.43 0.17 6.69 2.42 4.35

 2 Capital Goods 0.48 0.63 0.29 6.83 2.40 13.05
 3 Chemical & Petrochemical 0.59 0.69 0.24 2.44 1.46 4.57
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 4 Consumer Durables 0.57 0.38 0.34 1.02 1.33 1.84

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 5 Finance 1.85 2.30 0.92 1.83 1.18 15.74

 6 FMCG 1.18 1.21 0.52 1.80 1.44 3.68
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 7 Healthcare 1.97 1.80 1.44 3.75 1.70 9.26

 8 Housing Related 0.46 0.53 0.29 4.18 1.88 11.32
 9 Information Technology 7.65 3.64 9.22 6.26 2.14 21.76
10 Metal, Metal Products & Mining 0.88 0.94 0.45 3.08 1.53 3.34
11 Oil & Gas 2.61 1.21 3.91 2.04 1.33 11.61
12 Power 1.12 1.17 0.70 4.08 1.76 4.92
13 Telecom 2.45 1.47 2.55 3.65 1.53 7.47
14 Textile 0.72 0.92 0.41 0.75 1.11 3.05
15 Tourism 2.88 2.85 1.31 0.93 0.84 6.41
16 Transport Equipment 0.79 0.86 0.36 1.53 1.02 2.10
17 Transport Services 0.92 1.08 0.59 3.54 1.72 6.03
(Table 4 continued)

Management and Labour Studies, 37, 3 (2012): 179–193

A Sectoral View for Indian Capital Market 191

(Table 4 continued)
Panel IV: Sub-period 3 (2004–10)
S. No. Sector Mean Median S.D. Kurtosis Skewness Range
 1 Agriculture 0.52 0.43 0.36 6.69 2.42 4.35
 2 Capital Goods 1.39 0.63 1.28 6.83 2.40 13.05
 3 Chemical & Petrochemical 1.05 0.69 0.70 2.44 1.46 4.57
 4 Consumer Durables 0.56 0.38 0.48 1.02 1.33 1.84
 5 Finance 5.19 2.30 3.83 1.83 1.18 15.74
 6 FMCG 1.74 1.21 1.13 1.80 1.44 3.68
 7 Healthcare 2.88 1.80 1.46 3.75 1.70 9.26
 8 Housing Related 2.95 0.53 4.42 4.18 1.88 11.32
 9 Information Technology 3.90 3.64 1.02 6.26 2.14 21.76

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10 Metal, Metal Products & Mining 1.30 0.94 0.79 3.08 1.53 3.34
11 Oil & Gas 1.62 1.21 1.06 2.04 1.33 11.61
12 Power 1.48 1.17 0.87 4.08 1.76 4.92

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13 Telecom 1.28 1.47 0.60 3.65 1.53 7.47
14 Textile 1.38 0.92 1.02 0.75 1.11 3.05

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15 Tourism 3.29 2.85 1.82 0.93 0.84 6.41

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16 Transport Equipment 1.17 0.86 0.54 1.53 1.02 2.10
17 Transport Services 2.12 1.08 2.01 3.54 1.72 6.03
Source: Author’s own. C
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While studying the behaviour of price multiples we observe that over a long period mean and standard
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deviation may not be appropriate as the skewness and kurtosis measures are quite high for underlying
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distributions. We find the similar results for P/BV, P/CF and P/S ratios. We also find that multiple distri-
C

butions have high skewness and kurtosis in initial period which sobers down for more recent history. We
therefore feel median and range are better descriptors of P/E multiples given the nature of data. In fact
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the price multiple distributions are approximately normal for sub-period 3 (2004–10).
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Mean and median P/E for all the sectors except Tourism, Housing-related and Consumer Durables
has shown a common pattern of decline from sub-period 1 to sub-period 3. The similar trend was
observed for other three price multiples with the exception of IT in P/BV, Housing-related for P/CF and
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housing-related and Transport Equipment for P/S. In the sub-period 2, mean and median P/E fell sharply
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for all the sectors as this was the bearish phase for market. P/E of Agriculture sector saw a steep fall
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wherein the mean and median P/E ratios fell from 21 and 15 levels (in sub-period 1) to 5.5 and 5 respec-
tively, in sub-period 2. We also find that mean and median for other price multiples also fell in the same
period except in IT wherein these two parameters had increased sharply. This was a period when globally
the IT sector was going through a boom phase.
The P/E, P/BV, P/CF and P/S ratios of three sectors, viz. Consumer Durable, Tourism and Housing-
related have increased in sub-period 3 in comparison to sub-period 1. The reason for contradictory
behaviour of these three sectors compared to rest of the sample could be owing to their strong growth
potential in these three sectors, lower sectoral risk and/or high volatility of sectoral multiples. It can be
seen from the Tables 1–4 that both standard deviation and range of price multiples in these three sectors
have increased over time due to which investors have demanded high multiples.

Management and Labour Studies, 37, 3 (2012): 179–193

192 Asheesh Pandey

We also observed that for total period median P/E of IT has been highest at around 21, followed by
Tourism and Healthcare at 18 and 17 respectively. The lowest median value is for Transport Services at
around 6 followed by Agriculture at 7.5. Oil sector has highest range followed by Capital Goods and
lowest being Transport Services. In case of other price multiples also we observed that median for IT
sector has been highest over a period of 21 years.
Our study also observes that we cannot standardize high and low price multiples for all the sectors at
the same level. As shown in the Table 1 the mean P/E ratio for Agriculture sector is around 11 whereas
it is 30 for IT. Similar results are observed for sub-periods as well as for other price multiples. Therefore
we can conclude that there cannot be single number for high or low price multiples for all the sectors or
for the market as a whole. Our study proves that over time different sectors have different high and low
price multiples.

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Concluding Remarks

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In this paper, we analyze the time-series behaviour of price multiples in India from 1990–2010. The price

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multiple distributions tend to be non-normal prior to 2002. On post-2002 basis the price multiple

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distributions are approximately normal, thus making mean and standard deviation relevant descriptive
ER
statistic measures in the Indian context. Our findings are extremely relevant for portfolio managers,
investment analysts as well as for institutional and individual players who regularly use information
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about price multiples to detect any misevaluation and develop trading strategies thereon. Our results add
to the literature available in emerging market and are also useful for global portfolio management.
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References
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Beaver, William, & Lambert, Richard (1980). The information content of security prices. Journal of Accounting and
Economics, 2(1), 3–28.
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Dhankar, R.S., & Kumar, Rakesh (2007). Portfolio performance in relation to price earnings ratio: A test of efficiency
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under different economic conditions. The Journal of Applied Finance, 13(1), 37–45.
Gill, Suveera (September 2003). P/E ratio revisited. Finance India, XII(3), 937–951.
Gupta, L.C., Jain, P.K., & Gupta, C.P. (1998). Indian stock market P/E ratios-A scientific guide to investors and
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policy makers. Society for Capital Market Research and Development.

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Liu, Jing, Nissim, Doron, & Thomas, Jacob (March 2002). Equity valuation using multiples. Journal of Accounting
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Research, 40(1), 135–172.

Liu, Jing, Nissim, Doron, & Thomas, Jacob (September 2002). International Equity Valuation using Multiples.
Working Paper.
Liu, Jing, Nissim, Doron, & Thomas, Jacob (September 2005). Cash Flow is King? Comparing Valuations Based on
Cash Flow vs Earnings Multiple. Working Paper.
Ou, Jane A., & Penman, Stephen, H. (1989). Accounting measurement, P/E ratio & information content of security
prices. Journal of Accounting Research, 27, 111–144.
Pandey, A. (2012). Price to earnings versus price to sales: A comparative study for Indian capital market. Abhigyan,
30(1).
Skogsvik, Kenth, & Skogsvik, Stina. (2001). P/E-Ratios in Relative Valuation-A Mission Impossible. Working
Paper.

Management and Labour Studies, 37, 3 (2012): 179–193

A Sectoral View for Indian Capital Market 193

Asheesh Pandey is Assistant Professor, Finance, at Jaipuria Institute of Management, Noida

with around 13 years of teaching and industry experience. His industry experience is in the field of
operations, equity research and investment banking. He has done his PhD from Department of Financial
Studies, Delhi University. He regularly contributes research papers in the area of capital markets, market
efficiency, equity valuation, asset pricing etc. in national and International Journals. His research inter-
ests are Corporate Finance and Equity Valuations. He has taught Corporate Finance, Equity Valuations,
Security Analysis and Portfolio Management, Indian Financial System and Financial Accounting.
E-mail: asheeshpandey@rediffmail.com

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