Investors often use the industry price-to-earnings (PE) ratio as a benchmark to evaluate stock valuations. Buying a good stock at a reasonable price is one of the fundamental principles of wealth creation in the stock market. If an investor overpays for a stock, they may see little to no returns, even if the company performs well. On the other hand, purchasing a stock at a deep discount can yield substantial returns, even with moderate company performance.

Every investor aims to buy stocks at attractive prices. However, the criteria for determining whether a stock is cheap or expensive vary. Some investors rely on the PE ratio, while others use metrics such as the price-to-book (P/B) ratio, dividend yield, or the sales-to-market capitalization ratio.

Among these valuation methods, the industry PE ratio is often discussed as a stock selection tool. Given its popularity, many investors ask how much weight should be assigned to this metric when making investment decisions.

This article explores the relevance of the industry PE ratio in stock analysis, outlining its significance, limitations, and how different investors incorporate it into their strategies.

What Is the Industry PE Ratio?

The industry PE ratio provides an average valuation measure for all publicly listed companies within a specific industry. It can be calculated in multiple ways:

1. Simple Average: The arithmetic mean of the PE ratios of all constituent companies.
2. Market-Capitalization-Weighted Average: A weighted mean where larger companies have a greater influence on the final ratio.
3. Aggregate PE Ratio: The total market capitalization of all companies in the industry divided by their combined net profits.

How Investors Use the Industry PE Ratio

Investors interpret and apply the industry PE ratio differently based on their beliefs:

1. Industry-Specific PE Trends: Some investors assume that certain industries naturally command higher PE ratios than others. For example, service-sector companies typically trade at higher PE ratios than manufacturing firms due to their lower capital intensity. Similarly, fast-moving consumer goods (FMCG) companies tend to have higher PE ratios than commodity-based industries like cement.
2. Relative Valuation: Some investors believe that a stock trading below its industry PE ratio is undervalued, assuming that it should be priced in line with the industry average.
3. Mean Reversion Theory: Many investors rely on the idea that stock PE ratios eventually revert to the industry average. According to this theory, stocks with lower PE ratios should eventually rise, while those with higher PE ratios should decline, aligning with the industry PE over time.

Since industry PE data is easily accessible from public sources like Moneycontrol, investors often use it as a quick valuation tool.

Why We Don’t Rely on the Industry PE Ratio

Despite its popularity, we do not consider the industry PE ratio a reliable stock selection criterion. There are several reasons for this, which we will discuss further in the article.

Why the Industry PE Ratio May Not Be Relevant for Investors

1) Significant Variation in PE Ratios Within the Same Industry

Stocks within any industry rarely trade at similar PE ratios. There is always a wide range of valuations, regardless of whether the industry is manufacturing or services. Some companies may command a premium due to strong fundamentals, competitive advantages, or growth prospects, while others trade at lower valuations due to weaker financials or business risks. This variation makes the industry PE ratio an unreliable benchmark for stock selection.

The following data on the Cement-Major and Private Banking industries from Moneycontrol, taken on March 21, 2025, clearly illustrates the wide variation in PE ratios within these sectors.

Source : Money Control

The PE ratios of the constituent companies vary significantly.

In the Cement-Major industry, Andhra Cements Limited trades at a PE ratio of 1.74, while KCP Ltd has a PE ratio of 766.22, compared to the industry average of 42.

Source- Money Control

In the Private-Banking industry, Jk Bank trades at a PE ratio of 4.97 , while Yes Bank has a PE ratio of 25.25 , compared to the industry average of 11.

The PE ratios of individual stocks within an industry have always exhibited significant variation in the past and are likely to continue doing so in the future. Some consistently underperforming companies will trade at lower PE ratios, while strong performers will command higher valuations.

Occasionally, undervalued stocks with low PE ratios may gain recognition through sustained good performance, leading to higher valuations over time. Conversely, once high-performing stocks that lose their competitive edge may see their PE ratios decline as their business weakens.

Additionally, companies experiencing a downturn may initially see their PE ratios drop as both earnings and stock prices decline. However, if earnings fall significantly while the stock price remains relatively stable, the PE ratio can appear artificially high. In extreme cases, when earnings turn negative, the PE ratio becomes meaningless or trends toward infinity.

This demonstrates that there is no fixed standard for PE ratios within an industry. Contrary to the common assumption that all companies in a sector should trade within a certain PE range, valuations are ultimately driven by a company’s individual performance. The market rewards well-performing companies with higher PE ratios and penalizes underperformers with lower valuations.

2) Well-Performing Companies Within an Industry Typically Trade at Higher PE Ratios Than Underperforming Ones, Even in High-PE Sectors

An investor will notice that well-performing manufacturing companies often trade at higher PE ratios than underperforming service-sector companies, challenging the common belief that asset-light service industries should always have higher PE ratios than capital-intensive manufacturing or commodity sectors.

For example, in the latest PE data, established cement manufacturers like UltraTech Cement Limited, J.K. Cement Limited, and ACC Limited trade at PE ratios between 35-55, despite operating in a capital-intensive sector. In contrast, major players in the asset-light banking industry, such as ICICI Bank Limited and Axis Bank Limited, have lower PE ratios of 20.5 and 17.2, respectively.

The difference becomes even more pronounced when comparing these high-performing cement companies to struggling banks like South Indian Bank and Punjab & Sind Bank, which have PE ratios of just 6.1 and 3.2, respectively.

This highlights a key insight: PE ratios are primarily driven by a company’s business performance rather than the industry it belongs to. If a company delivers strong results, the market will reward it with a higher PE multiple—regardless of whether it operates in manufacturing, services, or any other sector.

3) Relying on Industry PE Ratio for Valuation Assumes Mean Reversion, Which May Not Always Hold True

Investors often assume that a stock trading below the Industry PE is undervalued, while a stock trading above it is overvalued.

This belief is based on the assumption that stocks with lower PE ratios will eventually rise to match the Industry PE, while those with higher PE ratios will decline toward the industry average..

This assumption is based on the Mean Reversion Theory. Investopedia defines mean reversion as:

However, real-world evidence suggests that relying solely on the Mean Reversion Theory may not always lead to successful investment outcomes.

One of the most famous examples of the failure of this approach is Long-Term Capital Management (LTCM)—a hedge fund managed by some of the brightest financial minds, including Nobel laureates Myron S. Scholes and Robert C. Merton, co-creators of the Black-Scholes-Merton model for options pricing.

LTCM’s investment strategy was based on the assumption that yields of various financial instruments would always revert to their historical averages. After analyzing years of yield data, the fund systematically bought securities when their yields dropped below the historical average and sold them short when they rose above it—expecting them to return to the mean over time.

LTCM successfully profited from this strategy for about four to five years. However, in 1998, the expected mean reversion failed to occur. Instead of returning to historical averages, yields moved even further away from the mean. Due to its heavy leverage, LTCM suffered massive losses and collapsed within days.

This serves as a cautionary tale for investors who assume that a stock trading at a lower PE ratio than its industry will eventually rise to match the Industry PE. While mean reversion might happen in some cases, there is no guarantee. In many instances, the expected reversion never occurs—or it takes so long that the investment’s returns become unattractive.

As the renowned economist John Maynard Keynes famously said:

“Markets can remain irrational longer than you can remain solvent.”

4) Industry PE Ratio Is a Reflection of Individual Company PEs, Not a Determining Factor

The Industry PE ratio is a derived metric, calculated either as a simple average or a market-capitalization-weighted average of the PE ratios of its constituent companies. Changes in the PE ratios of individual companies directly influence the Industry PE ratio, causing it to rise or fall.

As discussed earlier, PE ratios of individual companies within the same industry can vary significantly. This means that Industry PE does not dictate the valuation levels of its constituent companies—it is simply a reflection of them.

Moreover, if an investor manages to buy a high-potential stock at a low PE ratio in an industry that currently has a low overall PE, then as the company performs well and the market assigns it a higher PE, it will push up the Industry PE.

This reinforces the idea that Industry PE is shaped by its constituent companies—not the other way around. Instead of focusing on Industry PE levels, investors should look for strong-performing stocks available at attractive valuations. Over time, as these stocks get re-rated, they will raise the Industry PE rather than being constrained by it.

5) Industry PE Ratio Data May Be Unreliable Due to Ambiguous Company Classification

Often, a company operates in a niche industry with very few listed peers. In such cases, financial portals like Moneycontrol may classify it under a broader industry category that does not accurately reflect its business model.

Since these portals have a limited set of predefined industry classifications, their staff assigns the company to the closest matching industry. As a result, the Industry PE ratio may be based on non-comparable peers, making it an unreliable benchmark.

Investors who rely on Industry PE for valuation decisions in such cases risk making incorrect assessments due to the inclusion of irrelevant peer data.

Example: Misclassification of IRCTC

A notable example of industry misclassification is Indian Railway Catering and Tourism Corporation (IRCTC).

• Business Model: IRCTC operates in multiple segments, including railway ticketing, catering, and tourism services. It has a unique monopoly in online railway ticket booking in India.
• Industry Classification Issue: Financial portals like Moneycontrol have historically classified IRCTC under “Tourism & Hospitality” or “Online Services”, despite its core business being very different from traditional hospitality or travel companies.
• Irrelevant Industry PE Benchmark: The Industry PE ratio for Tourism & Hospitality often includes hotel chains and travel agencies, which operate in highly competitive markets with different business models. Comparing IRCTC’s PE ratio to these companies gives a misleading valuation picture.

Why This Matters for Investors?

An investor relying solely on the Industry PE ratio might incorrectly conclude that IRCTC is overvalued or undervalued based on non-comparable peers. This highlights why Industry PE should not be the primary valuation tool and why investors must focus on individual company fundamentals.

FAQs on Industry PE Ratio & Sector Analysis

Q1: How does the market decide what PE ratio to assign to a company?

A: The PE ratio reflects how much investors are willing to pay for a company’s earnings. It depends on multiple factors, including:

• Earnings growth (higher growth often leads to higher PE)
• Debt levels (high debt can lead to lower PE)
• Industry trends (cyclical industries may have fluctuating PEs)
• Market sentiment (investor perception can drive PE up or down)

Since some of these factors are quantitative (e.g., earnings growth) and others are subjective (e.g., investor perception), there is no fixed way to determine the future PE of a company.

Q2: How can I learn about new industries before investing?

A: To understand a new industry, follow these steps:

1. Study industry reports – Look at market trends, competitive landscape, and key players.
2. Analyze financial statements – Identify revenue sources, profitability, and debt levels.
3. Follow industry news – Keep up with regulatory changes and economic cycles.
4. Compare valuations – Check how companies within the sector are valued and why.

For a deeper dive, refer to our article: “How to Analyze Companies in Industries New to You?”

Q3: How do I analyze cement, sugar, and power companies?

A: Each sector has unique characteristics:

• Cement Industry: Demand depends on infrastructure and real estate growth. Look at capacity utilization, pricing power, and raw material costs.
• Sugar Industry: Highly cyclical due to government regulations and weather impact on sugarcane production. Analyze cost structures and global sugar prices.
• Power Industry: Divided into thermal, hydro, and renewable energy. Evaluate power purchase agreements, tariffs, and regulatory risks.

Q4: Why does Andhra Cement trade at a PE of 1.74, while KCP Cement trades at 766.22?

A: The significant difference in PE ratios between Andhra Cement and KCP Cement can be attributed to multiple factors:

• Financial Performance & Profitability: KCP Cement may have stronger earnings growth, better margins, or a more efficient cost structure, leading to a higher PE ratio. Andhra Cement, on the other hand, might be struggling with low profitability or losses, which results in a very low PE.
• Market Sentiment & Growth Expectations: Investors might expect KCP Cement to deliver higher future earnings, justifying a premium valuation. Meanwhile, Andhra Cement’s business outlook may not be as promising.
• Debt Levels & Financial Health: A company with a strong balance sheet and lower debt is generally rewarded with a higher PE multiple. If Andhra Cement has high debt or financial instability, its stock may trade at a lower PE.
• Industry Positioning: KCP Cement could be viewed as a stronger, more competitive player in the cement sector, attracting higher investor confidence compared to Andhra Cement.
• Liquidity & Institutional Interest: Stocks with higher trading volumes and institutional ownership tend to have more stable and higher PE ratios.

Since PE ratios depend on both fundamental business performance and investor perception, the market assigns different valuations even to companies within the same industry.