Very common statement from the market analysts these days for the Indian stock market.  India Overvalued but the blogrally will continue.  Although based on valuation metrics, Indian equities are now trading at a significant premium to stocks in other EM countries some analyst claim this too.

We have consistently outperformed the market! … Sensex is now overvalued.

“The stock market is overvalued.” “The stock market is undervalued.”

Which one of these statements is true? Well I don’t know.  May be both

Thanks to quirks of the most popular way of measuring a stock’s valuation: the price/earnings ratio.

While no one disagrees about what the “P” is when calculating the ratio, there is no consensus on how to define earnings-per-share. One of the biggest points of dispute: whether to use analysts’ earnings estimates for the coming year or reported company earnings from the previous 12 months.

Here is a different thought: On shifting towards Conservative holdings…. This means favouring companies with a larger stock-market value, little or no debt, a track record of consistently rising earnings and that hopefully pay a handsome dividend.”

  • Stock-market value is a function of stock price – not a “conservative” benchmark.
  • “Consistently rising earnings” – if too consistent, could be an earnings manipulation problem.
  • Dividends are paid in cash, not earnings.

A quote from decades ago has always stuck with me: “Earnings are whatever some accountant says they are; dividends are real money”.