Thought for
the day
“I'm a true believer in karma. You get what you give,
whether it's bad or good.”
-
Sandra
Bullock (American, 1964 - )
Word of the
day
Falderal (n)
Mere nonsense; foolish talk or ideas.
(Source: Dictionary.com)
Shri Nārada Uvāca
What led to brutal assassination of Rahul Gandhi’s father
and grandmother?
Reality check @Nifty 6200 - IV
Valuations
We recognize that in past couple of years, Indian equity markets
have seen extreme polarization in terms of level of activity and valuations.
Most of the activity is now concentrated in a handful of stocks. In fact the
National Stock Exchange (NSE) has recognized the phenomenon and launched LIX
15, an index based on top 15 liquid stocks, which as per NSE tracks close to
95% of the prime 50 stock index CNX NIFTY. Accordingly, valuations of these top
stocks have diverged substantially from the broader market.
Nonetheless, for the sake of argument, the valuations of
benchmark indices are used.
Based on current estimates of next 12months earnings, Sensex is
closing close to its long term average PE ratio of 15x. Given the low growth,
stressed balance sheets, uncertainty over continuation of global flows and
fragile global economic conditions, there is little probability of any
sustainable re-rating of Indian markets in next 12 months at the least.
Even if we assume a 10% re-rating to 16x and best case 15%
earnings growth in FY15, Sensex may offer 14-15% return. The risk reward ratio
at this stage is therefore evenly poised. However, any further rise from
current level in next couple of months would make this ratio adverse and
susceptible to sharp sell-off.
On price to book basis Sensex is trading cheaper to its long
term average. However, given the asset utilization ratio at decade low, higher
leverage, chances of asset impairment and stress in receivable, this appears
logical and does not need any improvement.
With the yield gap (1yr forward Sensex yield vs. 10yr bond yield) at over
150bps, the bull market is certainly far away.
…to continue on Monday
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