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.

Sell sell sell (for the time being)

The Indian markets are on fire again. The sensex has gained over 50% in a span of about 3 months. This rise has followed a disastrous year for equities of course. There are normally three factors that people track to buy or sell in the markets.

One is fundamental. This is the basics of the business....how a company's doing, are the sales rising/falling, are the profits rising/falling; how the sector is doing and in general how an economy is doing. The second reason is technical. This is more got to do with numbers than anything else. This basically considers different period moving averages. For example the 200 day average, 50 day average, etc. This is used mainly by traders. I have never understood how this works. But there are pundits who swear by this method and I'm sure this is something that cannot be totally ignored. The third category is the herd mentality. Market seems to be going up today so lets buy some scrips. The best example is the Reliance Power IPO. Everybody just had to apply as everyone else was. I too was enamoured by the idea of listing gains and got into the trap.

As for any product we have to also make an informed judgement while buying a stock. Unfortunately, there are no set parameters using which we can make that judgement. Each individual decides the value of a company and buys accordingly. There are a few simple terms commonly used like -

EPS - Short for earnings per share. This is the total profit earned by a company divided by the total number of shares. For example if a company earns Rs.1000 and the number of shares it has it 200 then the company has an EPS of Rs.5

PE - This is the ratio of the current market price to the earnings per share. If a company earns Rs.5 per share and is trading at Rs.100 then it has a PE ratio of 20 (100/5)

PEG - This is the ratio of PE to growth in earnings of the company. For example if a company earns Rs.4 in 2007, Rs.5 in 2008 the growth in profits is 25%. If the PE for such a company is 20 then it has a PEG of 0.8 (PE/Growth - 20/25)

The knowledgeable use these basics to value a company. Other things remaining constant a company generally is bought at PEG less than 1 and sold if PEG is more. However, this is a barometer using past figures in mind. Things could be different in future due to which many other factors that could affect a companies' performance has also to be considered.

As per http://www.bseindia.com/ the Sensex companies have an earning of about Rs.720 for FY(financial year) 08 and the index trades at about 16 PE. This means 16 times the combined earnings per share of Sensex companies. As per most brokerages the earnings of these companies would increase between about 10%-15% (best case) in FY09. This would bring the earnings to about Rs.790-830 per share. Going by the theory of 1PEG the fair value of the Sensex should be between 7900 to 12450. The Sensex has almost hit the upper end yesterday. Besides, the external factors also would play on sentiment. The elections are expected to present no clear winner. There is a good chance that the left parties and/or Mayawati's BSP would play a crucial role to form the next Government. This would certainly spell trouble. Uncertainty is something the markets don't like. Given this scenario I feel the markets are going to go down from here and based on the election results make the next move.