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This parameter indicates that Indian stocks are attractive

Dec 26, 2013

In this issue:
» A third of corporate India facing debt repayment issues.
» Financial abuse amongst the US' elderly population.
» India's road regularity authority hits a dead end.
» China's distinct method to manage its manpower crisis.
» ...and more!

 Chart of the day
That Foreign institutional investors (FIIs) are interested in Indian stocks is not something new. The fact that their stakes in large Indian companies have increased over the past few quarters is something that proves this point. On the other hand, the actions taken by domestic institutional investors (DIIs) are quite the opposite. In the year till date, their net outflows stood at over Rs 732 bn. As per the Business Standard, this is probably the highest sold by such institutions in about 9 years; data prior to 2004 is not available. The earlier record was about Rs 570 bn in 2012. On the other hand, the net inflow by FIIs stood at Rs 1 trillion during the year. This is their third highest figure of such inflows reported in a year.

One may argue that redemption pressures, which may have led to a situation of net outflows by DIIs, must be taken into consideration here. Not to forget the outperformance of other asset classes, coupled with profit booking (with the BSE-Sensex touching its highest levels recently) as reasons for investors pulling their money out of stocks.

We believe this should ideally be the situation that investors should be taking when the markets seem overheated. Sure, the markets have touched new highs, but does that mean they are expensive?

Warren Buffett is of the belief that the best single measure for gauging the attractiveness of stocks in an economy is the 'total market capitalisation to GDP ratio'. The lower it is the, more attractive the stocks are in that market. The higher it is, the more expensive they are.

If one were to view valuations by this parameter, stocks look anything but expensive at the moment. At the end of FY08, the figure stood at about 106%, which indicated an overheated situation. Post the market decline, the figure fell close to 55% levels at the end of FY09. Going by the chart below, valuations picked up quickly thereafter. However, in recent years the ratio has moved lower. As of a couple of days ago, India's market cap to GDP ratio stood at about 64%, which is pretty much close to its thirteen year average.

Going by this parameter, stocks are not expensive
* As of December 23, 2013; It may be noted that the business daily has estimated
the FY14 nominal GDP growth rate to be 12% (5% growth + 7% inflation).

What does this suggest? A short answer would be that one can consider investing in stocks at the moment.

But when one views valuations of the different indices, it paints a slightly different picture - for the blue chips mainly that is! The BSE-Sensex trades at a multiple of about 17.8 times its trailing twelve month earnings, which is slightly above its long term average. Comparing this to the BSE-500 index, which comprises of the large cap companies in India, valuations are lower at about 15 times. Now, considering that the bluest of blue chip companies form a significant portion of this list of 500 companies - in terms of market capitalisation - it would be fair to assume that the collective valuation for the balance large cap companies would be much lower.

Also, if one looks at the smaller companies, i.e. stocks forming part of the BSE-Midcap and BSE-Small cap indices, they seem all the more attractive. Given the volatile earnings reported by them in the past few quarters, looking at these companies on a P/E basis may show a distorted picture. But when seen on a price to book value basis, stocks forming part of these indices collectively seem attractive. The price to book values of the BSE-Midcap and BSE-Smallcap indices stand at about 0.67 and 1 times respectively. These are much lower than their long term averages and attractive when gauged in isolation as well.

Considering the last five year period was one of the most challenging phases for companies, it would be relatively easy to identify the ones that have done well or those that have done much better than their peers. Investors would do well to identify such companies for investment opportunities, especially considering that the markets are not seemingly expensive at the moment.

Do you think that property prices will come down only when corruption from the real estate sector is eliminated? Let us know your comments or post them on our Facebook page / Google+ page.

Ask anyone how they would avoid investing in a leveraged company. Chances are that nine times out of ten, you would be advised to look at the company's debt to equity ratio. If it is within safety limits, the firm can be considered as a good candidate for investing. What doesn't get analysed often is the issue of liquidity. For if the company has built long term assets with relatively shorter term funding, there is a risk that the company may run into cash flow problems if the old debt is not refinanced. Alternatively, if the assets don't start generating revenues soon enough, even then the company could run into trouble.

The Economic Times reports how it is this latter issue that is giving lenders and borrowers sleepless nights these days. Sample this. As on September 2013, listed companies had total borrowings to the tune of Rs 24 trillion. And out of this, a whopping one third was with companies where interest costs exceeded the operating profits earned during the quarter! And the problem, as highlighted earlier, is not that of solvency but mostly of liquidity. In other words, thirty year assets were built with 10-year money with the borrower expecting money from the eighth year onwards. Well, the indebted companies will have to quickly offload other assets or somehow find new sources of funding to replace old debt. If not, we could well be staring at a crisis of huge proportions.

----------------- Introducing... Valuation Graphs -----------------

Now you can view P/E and P/BV graphs of India's leading corporates on Equitymaster...

Not just that... you can also see, for instance, how the valuations of Infosys compare with TCS over the last 3 years!

Start here with the valuation chart for Infosys...


It is generally roads that hit dead end. However, the irony in India is that its road regularity authority has hit a dead end. We are talking about National Highways Authority of India (NHAI) and the deadlock it is in over its project award policy. The 20 km per day dream has remained just that. In fact, as per a news article, this year not a single road developer has bagged a project out of the 20 toll projects that were on offer. And we believe it is the government itself which is to be blamed for such a lull response. Untimely approvals and higher premium payments asked by the authorities for awarding the projects are primary reasons for a mess in the road sector.

As a result, most developers have not shown much interest in the auctions. This is especially true for build, operate & transfer (BOT) projects. Here the developer has to invest his own money to construct the project. Later, the project is transferred to the government after the concession period ends. Hence, any delay in approvals piles up the interest cost for such projects since they are self funded via debt. This also hurts the balance sheet of road operators. Also, considering that road developers are facing financial crunch, they are unable to make premium payments to the government on time. Rescheduling the premium payments and reducing red tapism in the sector is the only way through which the fortunes of the sector can be revived.

The world's most populous country may be heading towards a manpower crisis. Doesn't that sound ironical? Yes, but that's true. We are referring to our neighbouring nation China. The dragon nation is threatened by a rapidly aging population. The reason for this has been the stringent one-child policy announced in 1979 which substantially lowered the population growth rate. Now as the country's population ages, there are more people retiring than entering the workforce. This is putting a significant strain on the country's young workforce.

Recently, Chinese policymakers partially relaxed the one-child policy to deal with the adverse demographic changes. Now, the country is planning to increase the retirement age. It must be noted that this would be the first time since 1950 that China is raising the retirement age. Currently, the retirement age for women is 50 years and for men it's 60 years. Increasing the retirement age would help in offsetting labour shortages and in driving economic growth.

It was supposed to be India's first mega power project. The first Prime Minister, Pandit Jawaharlal Nehru called it a 'temple of modern India'. However, corruption, financial irregularities and poor execution led to 'Damodar Valley Project' (DVC) reaching a financial dead end. It seems a good 70 years after the project was conceptualized in 1943, DVC is finally set to be wound up. As per an article in Economic Times, NTPC chief Arup Roy Choudhury, has made such a recommendation to the central government. With the additional charge of assessing the DVC project, Mr Choudhury has clarified that it will take a lot more than just intent for DVC to survive. In fact he has called for a paradigm shift in DVC's goals and business interests for it to become financially viable. The current inefficiency, negative cash flows and pile up of interest arrears are far from the plans envisaged for DVC. The government's dilly dallying in putting an end to the project has led to gross misuse of taxpayer funds. It would be worthwhile for the government to take a call on bleeding PSUs and make better use of taxpayer funds. That itself would help bride fiscal gap to some extent.

If you thought that scams is something that only Indians have to deal with, think again. Americans seem to be at the receiving end too. And the ones suffering the most are the elderly, a demographic which has been rising in the US. As reported in Moneynews, of all fraud complaints tracked by the Federal Trade Commission last year, people 60 years and older represented 26% of the victims. This is the highest for any age group.

The reason why the elderly are becoming easy targets is their inability to remain alert and detect frauds as they grow older. As their faculties weaken, they become easy targets for fraudsters. Scams and mis-selling is something that Indians grapple with as well. As far as financial services go, there are ample number of scamsters who advertise fraud schemes offering mouth watering returns. It is not clear whether there is any data available as to which demographic in India gets affected the most as a result of these frauds. But the menace exists and tackling the same remains a challenge.

In the meanwhile, Indian stock markets were trading firm. At the time of writing, the benchmark BSE Sensex was up by 57 points (0.28%). Power and Consumer Durable stocks were the biggest gainers. Most of the Asian stock markets were trading higher led by Hong Kong and Japan. The European markets opened on a positive note.

 Today's investing mantra
"A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest." - Warren Buffett

Editor's Note:
Continuing our coverage of The Equitymaster Conference, here is the latest update from Akshaya, our Roving Reporter...

Hi Dear Friend!

Greetings from your Roving Reporter!

I have some great news to share with you today...

The main theme for the Equitymaster Conference 2014 has just been shared with me. And I am happy to report that all the preparations to make it an extraordinary event are in full flow.

The 2014 Equitymaster Conference is titled - Beyond Uncertainty.

Yes, we both know that these are uncertain times and we are all looking for answers to a lot of questions...The Equitymaster Conference 2014 is being planned to guide you in answering all these questions and more.

As Rahul Goel, recently shared with me, "The main idea behind the conference for 2014 is that every attendee should leave with a better understanding of the current investment environment and with enough ideas to create a concrete actionable investment plan for 2014, and beyond".

Tanushree and Rahul Shah, the Co-Heads of our Research Team, are also preparing for their talk on which businesses are competent and strong enough to override these uncertain times. (By the way, both of them have asked me to convey that they look forward to meeting you, our valued reader, across the table at the conference).

So, Save the Date: 1st February, 2014 at The Taj Mahal Palace Hotel, Mumbai. And we'll all see you there!

For the next issue, we'll look into what the Keynote Speaker, and our Founder Director, Mr Ajit Dayal has in store for the conference. So, keep an eye out.

In the meantime, just to give you a heads-up, The Conference will be opened for Registrations in January 2014. However, there's a way for you to get a preferred entry into the event... Call us on 022-6143-4047 for full details or send an email to RovingReporter@equitymaster.com with your Equitymaster log-in Id.

Look out for the next update!

Best Regards,

Akshaya Singh
Roving Reporter
Equitymaster Conference 2014

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3 Responses to "This parameter indicates that Indian stocks are attractive"

afzal peerzade

Dec 27, 2013

I think real state prices are directly proportional to corruption not only in realestate but overall corruption in the system.the currupt money had find it's way into land investement.



Dec 26, 2013

Real estate mafia is too entrenched to be eliminated due to political patronage including by banks who toe the line of politicians.If banks take proper measures for recovery of NPAs in the sector, things will come around.Getting a loan from any bank by legitimate means is next to impossible for any ordinary indians. PSU banks are on the brink of collapse and the manipulated figures of NPAs are deceptive and as much as the profit figures.Our banks and Govt. can write fiction in statistics to fool all of us.



Dec 26, 2013

The real estate sector has influences on various other domains like job creation,price rise of construction materials,loan sanctions by financial institutions to individuals and companies. There are real estate developers who advertise that loans by banks available for purchase of land plots and most of these plots are left as they are for appreciation.This amount sanctioned by banks do not help in creating any jobs and hence no growth activities. Some real estate companies borrow heavily to promote such non-growth activities. The financial institutions should restrict their loan sanctions to companies with low debt-equity ratio (which may decided and fixed by RBI). Then property values will come down because the final product like apartments will be priced lower because corruption will reduce at various levels of sanction of loans.

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