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Irrational Exuberance - Obscene Valuations

A look at stocks whose current stratospheric valuations defy reason

Despite the recent correction, the market remains expensive, with the Sensex still trading at a 12-month trailing PE ratio of around 21.48. In such buoyant times, valuations of some stocks enter the irrational zone. We decided to hunt for stocks that are obscenely valued today. We agree that the practical value of this exercise is limited. Given the amount of importance we give to valuations in our magazine, we are confident that our readers will not touch these stocks with a bargepole. If, however, due to neglect some of these stocks are languishing in your portfolio, we hope that this story will spur you on to offload them.

Filters employed
The initial universe from which we selected these stocks is the BSE 500. First, we selected all those stocks that have a PEG (price-earnings to growth) ratio of more than two. (When looking for value picks, we choose stocks whose PEG is less than one.)

Next, we found out which stock among the Sensex constituents has the highest price-to-earning (PE). This turned out to be DLF. On November 19, 2010, it had a PE ratio of 54. The next filter that we deployed was to select those stocks which had a PE more than 54. We got six obscenely valued companies.

MMTC: MMTC is India’s largest trading company. It trades in minerals, metals and precious metals. Its listing on the stock exchange is cosmetic since 99.37 per cent (September 2010) stake in it is held by the government. Only 0.63 per cent is traded on the exchange, leading to low liquidity in the stock.

United Breweries: It manufactures, purchases and sells beer. It also earns revenue by licensing its brand. The promoters hold 75 per cent stake in the company.

GVK Power & Infrastructure: It is a holding company that focuses on power generation (gas, hydel and thermal), roads, airports, Special Economic Zones (SEZ), coal mines, oil and gas. The promoters hold 54 per cent (September 2010) stake in the company.

KGN Industries: The company trades in agro commodities such as edible oils, non-edible oils, petroleum products and lubricants used in the domestic market. The promoters hold 49 per cent.

Sunteck Realty: Sunteck Realty (Sunteck) is a realty and construction business. The promoters hold 65 per cent stake.

Shree Ashtavinayak Cine Vision: Shree Ashtavinayak Cine Vision is into production, distribution and exhibition of films. The promoter group holds 50 per cent stake in the company.

JM Financial: JM Financial is a holding company. It operates through its subsidiaries, joint ventures and associate companies. The promoters hold 66 per cent stake in the company.

As is clear from the table, the earnings per share (EPS) of all these stocks is very low compared to their stock price. This results in a high price-to-earnings (PE) ratio for them. Again, the PE ratio is high in the case of all these stocks compared to their three-year EPS growth rate, which results in a high PEG (price-earnings to growth ratio). Stay away from all these stocks till their valuations become more reasonable.