Dec 24, 2003|
Time to sit back and...
Indian equities are on a roll with the indices having gained approximately 65% in 2003 so far. The number become far more impressive if one considers the recovery in the indices from their lows in April this year, which is at over 90%! But then, the then prevailing valuations of the Indian stock markets distinctly suggested that a re-rating of the Indian stock markets was imminent. Valuations of about 11x-12x earnings in early 2003 was clearly out of sync with the past track record of India Inc. and the future prospects of the Indian economy. Just to put things in perspective, over the 7 years until FY03, the bottomline of the BSE-Sensex companies grew at a CAGR of 17%!
Source: Statistical Outline of India 2002-03
Note: December 2002 onwards, P/E is derived
Year 2003 is coming to an end and the current valuation of the Indian stock markets is at about 17x its trailing twelve months earnings. Further, according to various estimates, forward earnings of the index companies are likely to bring down the P/E multiple, back in the region of about 14x-15x. However, this is on the assumption that the earnings will continue to register respectable growth going forward into the next financial year.
This is based on the fact that the economy is improving, thanks to the normal and evenly spread monsoons this year. Further, it seems that much of the impact of good monsoons has already been factored into the stock prices of various sectors and stocks, which are likely to see the benefits of good monsoons flow into them with a lag effect of 6 months to 1 year. However, just a quarter away from hereon, and we will be back into the period wherein speculation about monsoons will start to surface. And god forbid, just in case if the monsoons fail to oblige India, India Inc. could once again be facing tough times.
Further, another factor that could have a serious impact on the 'E' of the P/E is the rising commodity prices, which seem to be showing no signs of subsiding yet. On the back of the huge consumption by China, many commodities are already currently trading at their multi-year highs. Commodities like coal, steel, sponge iron, copper, nickel, zinc, iron, alumina, pulp, crude oil, etc. have all gained substantial ground, some to the extent of 80%-90% over the prices prevailing last year. This rise in commodity prices could play a significant role in deciding the growth in fortunes of many sectors dependant on these commodities.
This is because, since many of the above commodities form the raw material in the production of other metals, it could create a dent in the operating margins of the user industries. For e.g. rise in prices of sponge iron could affect its user industry, steel, which could in turn affect the costing of automobiles, which have about a 15%-20% steel component in the final product. Similarly, coal, whose prices have surged by more than 25% in the current year, is a negative for its user industry, cement. It must be noted that while much of the raw materials purchasing is done at pre-determined semi-annual and annual contract prices, the spot purchases and re-negotiations of future contracts could lead to an upward revision in prices while buying the raw materials. While India Inc. has continued on its drive to improve efficiencies and rationalize costs, this exercise, which is being carried out since the last 2-3 years, will tend to lose its YoY effect. Till there is clarity as to whether the rise in raw material prices can be passed on to the consumers, this issue remains a cause of concern.
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.
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407