Motilal Oswal Financial Services Limited's (NSE:MOTILALOFS) Price Is Right But Growth Is Lacking After Shares Rocket 26%

Simply Wall St · 10/17 00:07

Despite an already strong run, Motilal Oswal Financial Services Limited (NSE:MOTILALOFS) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 284% in the last year.

In spite of the firm bounce in price, Motilal Oswal Financial Services' price-to-earnings (or "P/E") ratio of 20.6x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 34x and even P/E's above 66x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Motilal Oswal Financial Services certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Motilal Oswal Financial Services

pe-multiple-vs-industry
NSEI:MOTILALOFS Price to Earnings Ratio vs Industry October 17th 2024
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Motilal Oswal Financial Services.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Motilal Oswal Financial Services' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 95%. Pleasingly, EPS has also lifted 111% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 2.5% per annum during the coming three years according to the three analysts following the company. With the market predicted to deliver 20% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Motilal Oswal Financial Services is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Despite Motilal Oswal Financial Services' shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Motilal Oswal Financial Services maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Motilal Oswal Financial Services (1 is potentially serious!) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.