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Saturday, October 2, 2010

BSE SENSEX & Small Cap Index - Valuations

BSE SENSEX has rose by 13.4% in past one quarter. BSE Mid cap index has increased by 13.1% during the same period and BSE Small cap index rose by 12.9%. Is the BSE Small cap index available at cheap? Has it not risen as much as it should have? How would small cap stocks perform in near future?

Ok. BSE Small cap has increased least among all three if we look at quarterly performance. Let’s change our time period. Let’s look at the current financial year i.e. FY 2011. Last two quarters. During this period, BSE SENSEX rose by 14% and BSE Mid cap rose by 19%. BSE Small cap has rose by 21% in past 6 months. Now the numbers have changed completely.

Let’s look at the price to earnings ratio which is widely accepted parameter when we compare the index. BSE Small cap index is trading at a price to earnings ratio of ~ 17.6 and BSE SENSEX is trading at 23.8 These ratios are definitely higher than historical ratios of 16 and this fact makes the value investors little uncomfortable, especially if you look at SENSEX earnings. Whatever we are seeing in markets right now is a rally on the back of money being poured in by FII’s. I think people are getting over optimistic on this rally. And big investors over excited about optimistic economic conditions.

Small investors need to be little cautious. This does not mean you should sell everything you have but keep some cash with you. Maybe 60 – 40 % (60 invested, 40 cash) would be a good idea at this point. This is my personal opinion. Feel free to write your opinion.

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