The domestic brokerage highlighted that 104 companies are trading at over 50 times PE, while nine companies are trading above 100 times PE.
A company with a 100 times PE would need 83,000 times earnings in the 100th year to justify its current multiple.
Many of these high PE companies are in traditional sectors and could face significant disruption risks.
Even excluding young companies and industries, the number of high PE companies remains elevated.
If the industry’s growth phase were to be shortened by 20 years, required growth rates will be even higher.
According to Kotak's DCF model, such companies would require steep and sustained growth rates to justify their high PEs.
Kotak Institutional Equities has cautioned that the valuations of numerous Indian companies are unsustainable. The domestic brokerage highlighted that 104 companies are trading at over 50 times PE, while nine companies are trading above 100 times PE.
A company with a 100 times PE would need 83,000 times earnings in the 100th year to justify its current multiple. Many of these high PE companies are in traditional sectors and could face significant disruption risks.
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Kotak observed a widespread benevolence or complacency in the Indian stock market, resulting in excessively high stock prices. It noted a disconnection between valuation methodologies and fundamentals, making high multiples acceptable despite the underlying parameters' outrageous implications. Even excluding young companies and industries, the number of high PE companies remains elevated.
According to Kotak's DCF model, such companies would require steep and sustained growth rates to justify their high PEs.
"Companies will require sharper and higher growth rates over a shorter period to justify very high P/Es. A 100X P/E company, which may be in the growth phase over the next 40 years, will need to report an earnings CAGR of 20% over the next 20 years and 9% CAGR over the subsequent 20. If the industry’s growth phase were to be shortened by 20 years, required growth rates will be even higher. Even if we assume stable market structure and stable profitability, the particular sector will then require becoming 200X in the first scenario and 30X in the second one. Only a few sunrise sectors may pass this small test," Kotak said in its latest note.
Kotak cautioned that many sectors and stocks are enjoying exceptionally high profitability and returns, likely unsustainable beyond the next 5-10 years due to increasing disruptive forces. If profitability were to decline from current levels, the implied market size would need to be even higher, although Kotak deems this unlikely.
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