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Market check: Grab this opportunity...

Sep 16, 2003

Yesterday was a day of mayhem on the bourses as they spiraled downwards very strongly, on the back of selling pressure and profit taking witnessed across all sectors. However, the base of the huge fall yesterday was built last week when markets closed with losses over the week, breaking the 7 weeks continuous gaining streak. The BSE-Sensex has lost 240 points (Nifty - 81 points) in the last three trading sessions alone. And the obvious question in every investors' mind at present would be -what now? Now that the (much awaited) correction is happening (see chart above), investors who had missed the rally earlier and were waiting on the sidelines for a good entry point, must feel relieved. Now, apart from the people who are already into the markets and who will probably continue to buy at every decline, there is this new set of investors who are set to get onto the bandwagon. This in effect means greater retail participation, which is necessary for a healthy bull market to sustain. In fact, this correction in the market provides yet another opportunity for investors to build their portfolio.

But, will the markets go up again from the current levels? We feel, in all probabilities, yes, barring in case of another 9/11! Indian markets are bound to test higher levels. However, at the same time, investors should not expect abnormal returns in the short-term, as news and rumours play an important role in the daily activity, which gives rise to volatility. However, the long-term India Inc. story remains intact and corporates are, more likely than not, to deliver good performance in the visible future.

But why? This is because....

  • The Sensex P/E currently hovers around the 13x mark, considering that India is one of the fastest growing economies in the world, expected to grow at about at over 6% in the current fiscal, we believe that there is still potential for further improvement in the earnings ratio over the long term.

  • Moreover, if we consider the Sensex P/E in the last 5 years (excluding 2003), the average has been 17x. But here one can argue that this average would be skewed owing to the absurd P/E's the market had attained during the tech boom. True! So, now if we do not consider the 12 months figures around the tech boom period, the average P/E still works out to about 15x!

  • However, since valuations need to be supported with earnings growth, consider the CAGR growth of the BSE-30 companies. In the last 7 years, the compounded topline growth of BSE-30 companies has been almost 19% with a bottomline growth of nearly 21%. Keeping this in mind and the fact that other developed markets are trading at much higher P/E's, it is only time that Indian markets deserve better valuations.

  • Apart from the above, the other reasons the world has been talking about are also present - reforms, huge forex reserves, strong exports, the outsourcing story, etc., to name a few.

So, the final word is - do not miss it this time, grab this opportunity!

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Sep 29, 2020 12:23 PM