Pranabda screws the Big B !

Hold on....the title doesn't have anything to do with Mr.Bachchan.

A few days after being sworn in as the new Finance minister every news channel and all market participants had hyped up the next budget as the biggest ever. CNBC, my favourite channel, called it the Big B (B obviously standing for Budget). For those who remember, the markets rose 17 odd % the day they opened after the Congress Govt.came to power. This was obviously due to the over confidence that all India's problems would be solved very soon. Expectations with the first budget were sky high. Every possible good was already priced into the stock prices. It needed a budget tad below expectations to prick the inflated balloon and that's exactly what Pranabda delivered.

Within a short time into the budget speech the markets started tanking and by the end of the day had shed about 6% or so falling 870 points, going from near 15000 levels to near 14000 all in the span of 1 day ! What did Pranab Mukherji do so wrong? Well....he didn't do much and that was what was wrong. All the expectations came crashing down and realisation dawned. All of a sudden the gung ho sentiment has vanished and pessimism has set in.

I had posted on valuation here during the elections and had indicated the fair value for the Sensex to be 12450. However, the fundamentals have certainly changed over the last month due to the formation of a stable Govt.at the centre. I do expect reforms to kick in, although more gradually. I do expect corporate earnings to improve thereby giving it a premium valuation as well. This means a higher PE multiple (remember 1PEG). Higher the earnings higher the multiple. Speaking in numbers it would work out like this (approximately) - As per http://www.bseindia.com/ the current Sensex EPS is 762 and the Sensex trades at a PE multiple of 18. This multiple seems high with earnings still not growing at 18 times. Therefore a fair multiple would be 16 giving the Sensex a fair valuation of 12192. However, given that the earnings are expected to rise between 15%-20% in the future the Sensex FY10 EPS should be between 875-915. Considering this the Sensex should trade between 13145-18288 by the end of March 2010. If things work out good and the steps taken by the Govt.does help accelerate growth we will end up closer to the higher end. That would certainly be terrific given where we are presently.