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What BHEL's 15% Gain on Result Day Says about Sensex 40,000

Sep 8, 2016

In this issue
» The rally in emerging market stocks
» Why the sovereign bond yield is close to seven year low?
» Market update
» ...and more!
00:00
Tanushree Banerjee, Co-Head of Research

Exactly seven months back, Budget 2016 had turned out to be a damp squib, stocks were not the hot topic at cocktail parties, and markets were in a manic-depressive state.

That was when we spotted an undercurrent...

One that gave us the conviction to shout out to our readers about a change.

Our optimism didn't stem from research into just one, or two, or even a handful of stocks. No, our conviction sprang after crunching the numbers of hundreds of stocks going back a few decades.

The undercurrent pointed to an upside in the earnings data of Indian companies. Some math showed that the Sensex could go as high as 40,000 in three-to-four years.

What happened yesterday to BHEL's stock vindicated our claim that the market would start picking the cues of Sensex 40,000 sooner than later.

How is that? Will explain in a bit.

But first, please understand this is not about a lone company outperforming estimates in one or two quarters. We don't project quarterly EPS. Never will.

BHEL gained 15% yesterday on the back of a very encouraging earnings performance. After some quarters of losses, the engineering behemoth turned profitable in the last quarter of financial year 2016. And yesterday's results showed profits had a longer-than-expected tail.

For us, BHEL's results were no surprise. We wrote about the possibility of an earnings recovery when the company was going through its worst quarters. At the start of 2016, amidst huge losses, the company reported its highest-ever commissioning of projects and its highest order booking in five years. So we knew a turnaround in earnings might not only be sustainable but had the potential to offer huge upside in valuations.

And mind you, BHEL wasn't the only stock to indicate a U-turn in profits. Here is what we wrote in The 5 Minute WrapUp in March 2016:

  • The aggregate data we have pulled for Nifty companies suggests that profit margins were at a ten-year low at the end of FY15. Even if they were to rise to the average of the last ten years, not immediately, but three years out, the upside would be close to 70%.

Brokers and fund managers today are projecting five and six-digit targets for the Sensex. Their claims are steeped in shallow logic like 'India is currently a great place to be' and 'We are on a bull run!'

The rationale for our Sensex 40,000 projection, on the contrary, was not just ahead of the curve but backed by fundamentals. And the cues of the same are just beginning to show.

Stocks like BHEL that go on post a good set of numbers in the coming quarters will likely catch many market participants by surprise.

Even some not-so-sound stocks could ride the rally. Purely based on speculation, of course.

What would you prefer then?

To speculate on the next BHEL?

Or buy the stocks that are best positioned to ride the earnings upside to Sensex 40,000?

Guess you already have the answer.

02:40 Chart of the day

Stocks are rising, fast. This week the NSE Nifty broke through the 8,900 mark for the first time in a year and a half. Let alone large-caps, small-cap and mid-cap stocks have been doing just as well. Even on a sectoral basis, nine out of the twelve sectoral indices are showing positive returns in the calendar year so far.

Lest you think that this trend is India specific, you should know that emerging markets as a bunch have been doing pretty well. The global liquidity swooshing around has only helped. In fact, India's performance lies somewhere in the middle. As today's chart of the day shows, others like Brazil and Russian markets have done way better than India (up 12.5%) with their year to date returns coming in at 37.4% and 17% respectively.

You should know though that most of the countries that have done better than average in emerging market pack are commodities driven. Last year these were beaten down the most. With commodity prices showing signs of a breather, these have ridden the trend upward.

Indian Markets Rising Fast, But Not the Best Performer


03:30

And while stocks are rising, government bond yields have been seeing a sharp drop. In fact, the rally in bond prices has meant that the benchmark 10-year sovereign bond yield is on track for touching a seven-year low.

As per a reports in the Mint, yesterday's trading saw the yield on the January 2026 government notes breach 7.06%. Further, the yield on fresh 10-year government debt issued last week fell to as low as 6.82%. This is the lowest for the benchmark 10-year yield since August 2009.

As per a Reserve Bank of India statement announced the day before, the central bank is slated to buy up to US$1.5 billion of notes though open-market operations (OMO). This expected liquidity boost, perhaps along with expectations that inflation will head lower, is prompting yields to fall. Incidentally, this will also be the first OMO purchase made under new RBI governor Urjit Patel. With most market participants expecting bond yields to fall further in the months to come, it will be interesting to see how this trend plays out.

04:40

The Indian stock markets were trading on a marginally positive note today on the back of mixed buying activity across most index heavyweights. At the time of writing, the BSE-Sensex was trading up by around 40 points. Gains were largely seen in metal and auto stocks.

04:50 Today's Investing Mantra

"Behind every stock is a company. Find out what it is doing." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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Equitymaster requests your view! Post a comment on "What BHEL's 15% Gain on Result Day Says about Sensex 40,000". Click here!

2 Responses to "What BHEL's 15% Gain on Result Day Says about Sensex 40,000"

Chandravinod pathak

Sep 10, 2016

No one knows for sure about Sensex 40,000 except experts at Equity-master .

Tan ushers,Vivek Kaul and team back up their theories with excellent supporting arguments.

It looks more likely to be around 35,000. No one knows about political situation. As war is inevitable with Pakistan
On K issue.

Like 

KD

Sep 9, 2016

You are correct. Most of things revert to mean (mean reversion). From real estate crash of 2008 in USA to dot com bubble of 1999, everything reverted to mean. I do not know why people do not get this simple fact?

Like 
  
Equitymaster requests your view! Post a comment on "What BHEL's 15% Gain on Result Day Says about Sensex 40,000". Click here!
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