It was an unusually warm winter in the European continent in 1989. The western pacific was unusually warm due to El Nino conditions. Demolition of the Berlin Wall had just started. Under these settings the US President George Herbert Walker Bush and USSR General Secretary Mikhail Sergeyevich Gorbachev met at Malta, an archipelago in the central Mediterranean between Sicily and the North African coast, to discuss the end of the Cold War. The summit marked a watershed in the East West relationship. The summit was followed by formal end of cold war, completion of nuclear disarmament in pursuance of INF Treaty (1987) and dissolution of USSR in 1990-91. The apparition of the Second World War was finally liberated. The world looked forward to an era of peace, cooperation and progress ahead.
The two decades that followed 1990 would see
unprecedented growth in global economics. Global trade and commerce flourished.
The highest number of people got elevated from poverty in the third world
countries across Asia and African continents. Information technology
advancement revolutionized the way people worked and lived.
We could find many instances in history to show
that when two arch rivals decided to bury the hatchet, the event marked the
beginning of a new era of progress.
In business parlance, conventionally it is
believed that when the largest competitors decide to merge their operations, it
is usually marked by the end of a decline business cycle; even though beginning
of a fresh ascending business cycle might not immediately happen.
The recent deals between Zee Entertainment and
Sony Pictures Network; and PVR and INOX Leisure, in my view, are indicative of
the tide ebbing in the Indian entertainment industry. The consolidation in
broadcasting and exhibition businesses would create few mega players with a
larger pool of resources and reach to face the threats from alternative sources
like social media and pure OTT platforms. Of course, the improvement in the
business conditions and profitability may not happen immediately, it is highly
likely that the future of the Indian entertainment industry is much better than
it would have been otherwise.
Overall market also seems to have begun to
assimilate, though reluctantly, the tougher business conditions and growth
challenges. The adjustment may be two dimensional, like always. First, the poor
liquidity, higher bond yields and slower growth would require PE multiples to
be derated (revised downwards). Second, margin pressures due to higher raw
material and wage costs and lack of pricing power due to poor demand; and lower
profitability due to higher cost of capital and lower capacity utilizations
would warrant earnings downgrades.
Obviously, the 25-30% earnings growth forecasts
for FY22-FY24 looks difficult to meet. From this point of view, the “fair value
of Nifty” argument would require reassessment from both the angles – (i)
achievable earnings growth; and (ii) sustainability of earnings growth
trajectory.
In my view, both Nifty and Nifty Midcap might
be trading very close to their fair value based on likely FY23 earnings. Any
upside from the current levels would depend on the higher visibility of FY24
earnings. At the same time, I would not be worried about any sharp (15% or
more) correction from the current levels, given the visibility of FY23 earnings
and bond yields.
