Nov 11, 2004|
6,000? What next?
It's that time for the Indian stock markets when Indian investors are once again waiting for the Sensex to breach the coveted 6,000 mark. The Sensex closed just short of this level in yesterday's trade and in all probabilities, it would, once again, achieve this mark. This 'magical' figure was reached in early January this year and soon then, bears took over the reins of the Indian indices as the bulls were pushed into the back seat for the first half of the current year. However, now, that the bulls are back with a vengeance and with the indices once again near their highs, we again look at the prospects of India Inc. and consequently the stock markets.
To begin with, in early January this year when the Sensex had touched the 6,000 mark, the index valuation was over 17x its trailing 12 months earnings. Considering that the bottomline of companies, forming a part of the indices, has grown at a CAGR of 17%-18% over the last 8 years and the index valuations for the indices have also hovered in the region of about 16x-17x on an average, the brakes on the Indian stock market rally in early part of the year did not come as a surprise.
Coming back to the current scenario, there is once again an all round optimism on the bourses. The Sensex valuation is close to 15x its trailing 12-months earnings. Strong corporate earnings growth (15% YoY sales growth and 24% YoY PAT growth in 1HFY05 of top 200 companies), reasonably attractive valuations (approx. 10x-11x FY06E earnings) and improving management quality in terms of transparency are amongst the few positives that have created an air of optimism amongst not only domestic investors but also amongst the FII community towards India.
Further, if one looks at the expected GDP growth for the Indian economy over the next couple of years and compares it to the growth rates of other economies, India is clearly amongst the fastest growing economies in the world. India in recent years, has taken some good steps in terms of policy announcements for infrastructure development and also considering the reforms process currently underway in the country, the climate looks conducive for growth.
However, amidst the positives present, it is also important that investors do not lose sight of some key negatives that may shadow the growth prospects of India Inc. going forward. And amongst the bigger concerns are strong global crude oil prices and rising interest rates.
It is important to note here that as per estimates, every US$ 5 per barrel rise in oil prices retards India's GDP growth by 0.5% and increases inflation by about 1.4%. However, the impact of high oil prices has not been reflected aptly in the inflation figure, which has cooled off from its highs of 8.3% in August 2004 to the current levels of about 7%. This is because the Indian government had, until now, been adopting various measures to prevent the passing on of the effect of the rise in global prices to Indian consumers. However, with the government having bit the bullet finally, hiking petroleum product prices in the region of about 6%-9%, it's impact will soon start to reflect on consumer prices leading to higher inflation.
Further, with interest rates on the rise, it would affect the valuation of stocks. The rise in the interest rates raises the expectations of the markets participants, which demand better returns commensurate with the increased returns on bonds. Moreover, while in a low interest rate regime, corporates are able to increase profitability by reducing their interest expenses, in a rising interest rate scenario, since interest expenses rise, profitability takes a hit. That apart, when one calculates the inherent value of a company by the cash flow discounting model, there is a two-fold impact. One, there is a reduction in the cash flows due to lower profitability, second, there is a higher discounting rate due to higher interest rate regime. This leads to a relatively lower intrinsic value of the company. Due to this, there may be a change in asset allocation among equities and debt, which could favour the latter.
To conclude, while we are certain that India Inc. (on a broader scale) will continue to perform well in the medium to long-term, it is time to sit back and re-look at stock specific fundamentals and valuations, especially which have outperformed the benchmark indices by huge margins and make sure if their current valuations justify their growth prospects. We believe that considering the various positives working in favour of Indian equities, it would not be wise to stay out of Indian equities at the current juncture. However, the need of the hour is to follow a stock specific and staggered investment approach.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Aug 21, 2017
PersonalFN explains the chief factor pushing gold prices up of late.
Aug 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407