• MAY 30, 2003

Valuation story

It has been an upward trend for the stock markets over the last two months. This time the buying interest is not just in the banking sector alone, but also in other sectors like cement, refineries and engineering. With the US markets also firming up, technology majors have also looked up in the recent past.

As far as the rally in the banking sector is concerned, as we have maintained throughout this phase, optimism seems to be overplayed at the current juncture. This holds true atleast for some PSU banks that have a poor track record and a pile of non-performing assets. If one were adjust for the same from the net worth of the respective bank, the price to book value multiple is on the higher side. The reason for the optimism is three fold. One is the possibility of return of capital by PSU banks to the goverment. Secondly, the passing of the securitisation bill and lastly, the government bond buyback plan.

Though one agrees to the fact that these measures are likely to have a positive impact on the banking sector over the long-term, it is wise to exercise caution. Having said that, considering the malaise in the global banking sector, especially when one hears of the trend in countries like Japan, it is safe to say that India's banking sector is far more efficient at the current juncture. But there is a price for all the efficiency and expected change in the profit profile. Obviously, PSU banking majors have seen a correction in valuations (against the historic trend of 1x adjusted book value, the current range is an estimated 1.5x). But it does not hold true for all the companies. Like any other sector, there are industry leaders who set trends and there are laggards. This differentiation is important from the risk-return perspective. Investor's should exercise caution and there is no point blaming the market for losses.

Beyond the banking sector, the FY03 results so far have been an impressive one for India Inc. Both at the working capital and at the debt level, the top rung listed manufacturing companies have come a long way. This has been combined with an improvement in productivity as well. Some of them are now looking beyond India, which we expect could be profitable over the long term. Despite these the Sensex is trading at 11.7x trailing twelve months earnings. But as is said often, valuations correct to fundamentals over the long-term and it is time investor's build their portfolio.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407