What Is Stock Re-Rating? How It Impacts Valuations?

On the basis of any of the move that is considered as a key change such as change in fundamentals, change in management or a strategy for that matter, the stock may be for a re-rating. This re-rating is re-evaluation by market analysts and may result in downgrade or upgrade for a stock.

What Is Stock Re-Rating? How It Impacts Valuations?

Also, there are reported instances when the bull scenario in the equity markets as in the US in the year 2013 was fuelled owing to the re-rating of stocks there and had nothing to do with the stock because of the profit fundamentals of the American corporate.

Understanding Re-rating and its impact of stock ratio's

Re-rating in general is that based on the company's future course prospects investors are ready to pay a higher sum. Say in a case when the company X with a share price Rs. 100 and earnings as 10 has a P/E of 10, then in a case when the anticipated earnings of Rs. 15 takes the share price to Rs. 200 then its P/E also expands to 13.3. And this in the stock market parlance is referred as stock re-rating.

There can be a re-rating for stock, industry or the market as a whole on the various favorable such as steep increase in demand, improvement of the economic activity or government's favourable policy measures.

Also, there are scenarios, when the market that is flush with liquidity pushes the valuations higher and there is no visibility of earnings growth or the earnings might be even moderating.

India story currently

The global analysts despite the outperformance of India indices are skeptical given the steep valuations that it commands currently. There is seen unfavourable risk-reward and hence some of the reputed rating agencies and brokerages worldwide have re-rated their outlook for Indian markets to neutral from overweight as by Japanese firm, Nomura.

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