Looking beyond the statistics

The spate of statistical/ economic data over the past week has sent shivers down the spine of market participants. The analysis of this data suggests an economic slowdown. The IIP (Index of Industrial Production) figures for January '08 show a deceleration in growth rate to 5.3%, from 7.7% in December '07. Inflation index has grown at 5.11% for week ended 1st march, remaining above the 5% mark for 2nd week running. The news from International markets is also not very encouraging. Crude oil is trading at a historic high of $110 per barrel, Goldman Sachs has predicted Crude oil touchibg a peek of $175 per barrel. Consistent bad news on subprime losses for US firms continues unabated, latest casuality being Bear Stearns.

In the light of the above negative factors, a debate is raging in the media about the 'Reasonable valuation of Indian stock markets and the Sensex/Nifty'. Consider the following statistics:

• BSE Sensex PE multiple as on 14th March 08 stands at 19.44, as compared to PE of 15.03 for Dow Jones and a PE of 13.63 for Nikkei of Japan.
• Considering an estimated Sensex EPS of 1000 for March '09 (based on a conservative growth of 15% YOY), the current level of sensex translates into a one year forward PE of about 15.
• The sensex PE has fallen from the level of 28.5 reached in January '08, a fall of about 30%.
• PE multiple of BSE Midcap index is currently 16 (a fall of over 45% from its peak), and the PE of BSE Smallcap index is currently 12.7 (a fall of close to 60% from its peak).
• The closing level of sensex on 14th march '08, still gives a yearly return of 26%.

What, then is the intrinsic worth of the stocks trading on our markets? Looking beyond the statistics we find that sensex is not the barometer of broader markets. The valuations of broader markets are quite low as compared to the sensex. There are distortions within the sensex stocks as well. As of 14th March '08 20 of the sensex stocks are trading at a discount to their August '07 prices, and only 10 stocks are in the positive territory. The stocks with high PE multiples are L&T (42), BHEL (31), HDFC (30), and low PE stocks are Tata Steel (10), Hindalco (8). But mere comparison of PE ratios will not suffice. Individual stocks are discounted on the basis of their future growth prospects. This explains the distortion between their respective PE ratios. By the same analysis, comparison of absolute PE ratios of the Sensex with Dow jones or Nikkei has no meaning because the growth expectations of Sensex stocks is between 15-18% YOY against a growth of under 3-5% for other indeces.

Our markets have no major triggers for the next 15 days or so. Therefore, we shall continue to follow cues from the global markets. From 10th April onwards, the 4th quarter/annual results of companies will be declared, which will decide the future course of individual stocks and the markets. That would be an opportune time to shuffle your portfolio by getting rid of laggards and getting into good long term growth stocks.

The markets seem to be trading in a range of 15000- 19000 over the next 4-6 months. The chances of a closing below 15000 on the sensex and 4500 on the nifty is very low (although it may go down further intraday). The consolidation near the lower end of the range for a couple of weeks will be good for the markets in the long run. Patience is the key for investors.