As an investor in Indian equity markets, one should question the valuations of the market, calling it “expensive” or “cheap” depending on the number.

The question is more relevant today, given that ‘absolute’ valuations are in the upper end of the range for the markets we have seen over the past 20 years (Indian markets, compared by the Nifty 50, traded between a range of 12 and 38 from a multiple at 1 year over the past 20 years).

It is natural that this environment gives rise to some degree of concern about valuations and the ability of portfolios built today to build up capital over the next five years and more.

We spoke to Naveen Chandramohan, Founder and Fund Manager at ITUS Capital to help us understand Multiple Price Earnings and its implications:

The PE (defined as the multiple of the Price Earnings) is a measure that is readily available in the investor’s toolkit, it is important to give equal if not more attention to a company’s profit growth.

The collective market will often value the consistency of growth of the underlying companies at an expensive angle, as these companies tend to create value over time.

Looking at the example of Avenue Supermarts, which was expensive based on a valuation measure of PE when it came out with an IPO in 2017 (was valued at a multiple of PE of 90x earnings over 1 year ). Shareholder value has increased tenfold over the past 4 years and is still considered expensive.

One of the big lessons for me as an investor has been to look at the quality of the company’s earnings, which has increased by 20% since then.

More importantly, as a country, we do not have an organized retailer in India with an own balance sheet listed in the country (own defined by the capital structure and debt on the balance sheet).

The scarcity value of the company means that one has no alternative to expose oneself to the organized growth of the retail market in India.

Unfortunately, a metric like PE in this case, while it can serve as a tool, will never describe a company’s true value over time (which is best defined by the growth it generates through its profits. and its liquidity).

Today, when looking at corporate profits across all industries, absolute profits and profit growth across all industries will look robust.

As an investor, it is important to separate sustainability from the earnings of individual companies and seek to own those in the portfolio, which may continue to show growth in cash flow over time.

In a bull market, as we are now, every company we buy looks like winners (especially when we have a confirmation bias of the daily price movements that justify our choices), however, it is now more than ever that An investor needs to be willing to pay for sustainable earnings growth, rather than buying “cheap” companies as measured by multiples of PE.

Creating value from here will be done by owning good quality companies rather than worrying about market PE multiples.

(Disclaimer: The opinions / suggestions / advice expressed here in this article are solely by investment experts. Zee Business suggests that its readers consult their investment advisers before making a financial decision.)