• FEBRUARY 24, 2001

The Survey: Implications for the market

The Economic Survey presented to Parliament has some interesting sidelights. One thing, which struck the eye in the capital market section was that the average price earning multiple over the last seven years has been 24.4. This implies that each rupee of earnings by listed companies has been valued, on an average, by 24.4 times. The current price to earning multiple of the BSE Sensex is at 25.7 on trailing earnings. If one were to take into account forward earnings estimates the earnings multiple of the Sensex stands at less than 22 times.

Of course this is important only for top down investors and index trackers rather than for those who pick stocks based on valuations based on fundamentals and the quality of management. But it does indicate the overall level of the Sensex vis-à-vis the earlier years,

The survey has also hinted at lowering small saving interest rates in the future, which would imply further investments in mutual funds thereby implying further funds flowing into the stock markets. The trend in shorter term borrowings rate (exemplified call money rates) which were higher in 2000–2001 thanks to two rate increases in the second half of the year by RBI can also be expected to settle down at lower rates in the coming year. This would also reduce the cost of borrowings for meeting working capital needs by companies.

If the coming budget were to further allow an increase in the FII limits to 49% (the market rumours indicate raising the limits to 44%) then the good FII inflows can be expected to sustain post budget too. Whether that would be enough for helping Indian companies meet the free float criteria in the Morgan Stanley Capital International (MSCI) recast is difficult to say. .

MSCI has defined free float as the proportion of share capital that is deemed to be available for purchase in the public equity markets by international investors (FIIs). As a general rule, the free float of a security is its total number of shares outstanding less the holdings of the strategic investors, read promoters.

For countries, such as India, where the government has imposed a limit on FII shareholding (40%), the free float available to the shareholders is the lesser of the free float as defined (at present, constituents are included at 60% of the current market capitalisation, this would go upto 85% of the free float–adjusted market capitalisation after the recast) and the foreign ownership limit.

Overall the implication of the thoughts in the Survey seem positive for the market. The lowering of interest rates that would propel higher inflows into mutual funds and the higher limits for the FIIs would be happening at a time when the earnings multiples seem reasonable.

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