BSE SENSEX CAPE SHILLER VALUATION

Professor Robert Shiller of Yale University developed the Shiller PE 10 to more accurately reflect long term trends and smooth volatile components of the standard P/E ratio. PE 10 is also known as the Cyclically-Adjusted P/E ratio (CAPE). The “10” represents the rolling 10 year periods Shiller uses to calculate PE 10.

WHY THE NEED FOR PE10 ?

Profit margins and earnings are cyclical in nature; therefore the standard and widely popular P/E ratio can be quite volatile. The earnings for any one year may not reflect true earnings because they are affected by expanding and contracting business cycles. For example in the last quarter of 2019-20, and first quarter of 2020-21 are throwing abnormal numbers. All thanks to COVID 19 shock where GDP has tanked by -23% in the latest quarter. This temporary shock can make normal PE ratio look abnormally costly.

Shiller PE 10 uses rolling ten year periods to average or smooth earnings. Therefore the Shiller PE provides a better representation of long term earnings trends by showing a version of the P/E that is smoothed out over a number of years.

We attempted to arrive at PE10 numbers for all Sensex stocks. Here is the summary :

• M&M, NTPC, ONGC, SBI and PowerGrid are the most undervalued of the pack. Any reversal to mean will make them winners.
• Nestle, Hindustan Unilever, HDFC Bank and Titan are trading at excessive and unsustainable premium.
• Sun Pharma, HCL Tech and ITC are also available at undervalued prices

Table 1: BSE Sensex Stocks compared on CAPE SHILLER P/E vs Normal P/E