Price Earning Ratio is one of the easiest ratios to calculate and compare so people think it is easy to understand. Unfortunately it is not.
One of the important reasons of a PE difference is the market perception about a company. So a company which is growing well, and is profitable will get a higher PE than a company which has just growth or just profits. If a company has a steady dividend pay out policy it will have a good PE ratio. If a company is respected and everybody in your campus want to join that company it will have a good PE – look at HUL for example.
If the market perceives that it is a well run company with a good top management, it will have a higher PE.
See what I am saying?
Now cut to the BFSI space. Companies whose balance sheets are more trust worthy will get a higher PE. One thing that also comes out is if the promoter’s stake is high, it will have a higher PE. If the market believes their balance sheet it is likely to have a higher PE. IN other words the market perception of the potential growth, honesty of promoters / top employees, perception about the quality of assets, a high promoter holding (so he will not risk his capital) ….now read on about the Q3 of Hdfc bank, and keep wondering why it has such a high pe!
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