Friday, August 28, 2009

Nifty P/E and P/B ratios

2 of the most important and basic analytic ratios are Price/Earnings and Price/Book Ratio. Lets us explore how they have behaved over the past 9 years.

P/E Ratio
Price to Earning ratio in layman's words is how many times the share trades to its profit made.
Infosys if it trades at Rs 2000 and Profit (Earning per share or EPS) is Rs 100, its P/E ratio is 20.

P/B Ratio
Price to Book value ratio states the number of times the company is trading to its book value. Book value is nothing but the assets of the company. If the company's assets are sold off tomorrow and money distributed to shareholders how much each shareholder will get per share. IT companies typically have high P/B ratios.

P/E Ratio

If we look at the past 10 years in graph above, we have add 2 bubbles in 2000 and 2008.In such extraordinary times, the P/E can go to even 28. We do not have bubbles every other year.
So in other times?

Market has corrected sharply when P/E is between 21 and 23.If you see the May 03 to May 04 period market has corrected sharply almost to hit the bottom again in P/E terms. Remember it would not be exact bottom because the earnings would have increased by then ( In 1 Year).
This has happened almost 4-5 times in last 10 years that market has reacted from P/E 21-23.

Also, historically it makes a bottom around P/E 11.

P/B Ratio

During the dot com bubble it made a top of 5 and 2008 of around 6.5. This time it made a higher top because there are companies in the Nifty like RPl and Reliance Petro who have low book value along with the IT pack.
What is interesting is the lows it made.It has bounced 3 times when price is just 2 times the book value.

What do the above 2 graphs tell us?
Correction could be round the corner. If we take P/E of 23 as top, then 5159 could be near the top on Nifty. Whenever it corrects from this level it can goto P/E 11 to 15 range.
This could be in Nifty terms 2600-3400 range. It makes sense to take profits off the table if you go by the P/E historical data.

One caveat, companies in the Nifty change, but we take nifty as a broad barometer of the Indian Market.Hence, everything evens itself out.

Lets see if history repeats itself this time.

Saturday, August 22, 2009

L&T Finance NCD- To Invest or not to Invest

Microsoft Word - AAPNL10321 Prospectus _Final_.doc

L&T Finance is coming out with a NCD issue. The issue opens 18th August and closes September 04th. Should the retail investors invest or not?

What are Non-Convertible Debentures?

NCDs are instruments which enable the borrower to borrow money against some collateral. The collateral in this case would be the company’ assets. L&T Finance would also be creating a Debenture Redemption Reserve to take care of payments for the NCD. (To the extent of 50% of value of NCD)

Debenture holders stand a greater right to the assets than shareholders in case the company goes bust. The assets are sold and shareholders are the last to receive anything, once all debtors are paid.

How safe is this issue?

L&T Finance is 100% owned subsidiary of Larsen and Toubro. So, if you can buy L&T shares you can buy these NCDs. It has received high credit rating from the rating agencies.

How good are the returns?han shareholders in case the company goes bust. The assets are sold and s

They are offering returns from 9.5 to 10.25% as per the table below. A government 10 year bond is yielding 7.3% as of yesterday.

What if I need the money early?

These bonds will be listed on the NSE, and they will be available in your Demat account.So you can exit anytime you want. Tata capital NCDs which came out in Feb are traded on NSE and there is adequate liquidity. You will get the money in 3 days time from the time you sell.

Is there something more I can expect?

There is a reservation of 35% for the retail. The Retail quota is almost never oversubscribed so you get full allotment. The HNI and Insitituins oversubscribe. Ur They will want to buy it from you on listing.

If the issue on listing, trades at 9 pc, your bond will yield you Rs 1030 (0.6 pc gain per year for next 5 years).

The Tata Cap NCD issued at Rs 1000 is now trading at Rs 1122.So if the rates go down, the value of your bond increases, if it goes up, keep holding the NCD and enjoy 9.65 pc interest for next 5 years.

Should I wait for the last day for investing?

Allotment is on first cum first serve basis. The issue may close earlier also.

I would recommend invest in this issue under the retail section.






Interest Payment





Minimum Application (Rs.)

10,000/-(Retail) 1,01,000/-(NIIs & QIBs)

10,000/-(Retail) 1,01,000/-(NIIs & QIBs)

10,000/-(Retail) 1,01,000/-(NIIs & QIBs)

10,000/-(Retail) 1,01,000/-(NIIs & QIBs)

Multiples (Rs.)





Face Value (Rs.)





Mode of Interest Payment

Through various modes available*

Through various modes available*

Through various modes available*

Through various modes available*

Coupon Rate

9.51% p.a.

9.62% p.a.

9.95% p.a. compounded annually

10.24% p.a.

Yield on Redemption






60 months

60 months

88 months

120 months

Redemption Date / Maturity Period

60 months from the deemed date of allotment

60 months from the deemed date of allotment

88 months from the deemed date of allotment

120 months from the deemed date of allotment

Redemption Amount

Face value plus any interest that may have accrued payable on redemption.

Face value plus any interest that may have accrued payable on redemption

Rs.2,005/-per NCD

Face value plus any interest that may have accrued payable on redemption

Saturday, August 15, 2009

Is the Bear market Over?

Is the Bear Market over?

That is the key question these days. I feel it is not so. Some of my reasoning for why it is not so.
I have been talking of a W-shaped recovery since April now. Well, here are some more people talking about the same. Pual Krugman is a Nobel Laureate in Economics. Here is what he has to say.
He is talking about a W-shaped recovery for the US. We are 1 half through. We are just at the point of the 2nd leg up, from where if the recovery continues it will be a V-shaped recovery or 3rd leg down before the final recovery. The 2nd leg down may not be very bad in terms of economic impact, but the markets have risen up on the assumption that the recession is over. If it’s a W-shape, I expect the Dow to touch 4500-6000 levels by end of the year.

Second point I am making, is of the effect of the drought. The government has said the economy will grow at 5.8-6 pc this year. The government forecast is always beaten on the lower side never on the upper side (Government being the most optimistic entity around). Now, if the impact of drought hits the economy GDP can be shaved of 1-2 pc. Again I am quoting CMIE

This is without factoring any global weakness. If we grow at 3-4 pc (back to the Hindu rate of growth), do we justify P/E multiples of 20+. We are at P/E of 20.72.

Third point I would like to make is of Bear Market Rallies. The current rally bears an uncanny resemblance to the Bear market rally of the Great Depression 1928-1932.
Look at the chart below:
There was a similar rally like these times, with similar time frame.
The 1929-1930 equity ‘rally’ lasted 147 days and shares gained 46%. The rally off the March 6th low this year has been 145 days and gains of 46% have been made.
There have been 23 occasions going back to 1950 when the UK market rose at least 10 days in a row and every time it has been said it was a confirmed bull market.

This reminds me of my favourite quote:”Those who forget history are destined to repeat it.”
The folks who come on CNBC and other channels have a vested interest. They have to sell stocks to people. So they talk about Green shoots and stuff. Naina Lal Kidwai of HSBC in a moment of great honesty said the other day. “ I believe the recovery would be skittish. Government and other private companies should be greedy. They should raise funds while the going is good.”

That is why you will see such mega IPOs. The markets may not crash overnight. There is large scale distribution going on ever since we hit 4693. We are rising on lower volumes and falling on larger volumes.Classical case of strong hands distributing stuff to retail.

To sum up , China wall is alredy cracking. Here is what my favourite writer Yelnick has to say,
We may well hit 16500 on the sensex before beginning the leg down.Remember the markets can retrace a fall by 61.8%.
All in all, definitely no new buying, and look to book profits.

Saturday, August 8, 2009

IPOs: To invest or not to invest?

IPOs are a magnet for the retail investors. The question which begs to be asked is to invest or not to invest? The NHPC IPO is ongoing.

Lets try and understand why companies come up with an IPO?

Companies need capital to grow their businesses. The capital can be in the form of equity or debt. The companies cannot keep taking debts. There is a ratio known as Equity to Debt ratio. This means the money put in by investors as against loan taken by the company. The cost of debt is high. One has to pay interest on the loans taken. Companies usually come up with an IPO when the market is bullish. The idea is to raise the maximum amount of money by diluting the least amount of equity.

Where does the Retail investor feature in here?

A fixed portion of the IPO is reserved for the retail investor. IPOs bring in new businesses to list on the markets. The problem with IPOs is retail getting very little allotment.

The Positives:

1. New businesses like, retail, power, infra get listed and the investors get a chance to invest.

2. Get a share in the business at a price lower than what the market price would be.

3. Entry point for a long term investor.

4. Assured allotment (If you invest for 1 Lakh)

The Negatives:

1. Even if one invests the maximum 1 lakh, if the IPO is heavily oversubscribed one gets only shares worth Rs 10000, which may become Rs 15000 on listing.

2. The amount of shares got is so negligible that it makes no difference to one’s portfolio

3. If one is looking for listing gains your blocked money gives you a gain of 5 % on the 1 lakh locked. Investing it in say a blue chip may give you more amounts in same time. (Remember it’s a bull market)

4. If it’s a mega IPO. Market may tank while listing (Remember R Power)

5. The valuations are absurd. (There is no free lunch anywhere in the world)

The best strategy would be to make a note of such companies and buy them during market corrections at lower than IPO prices. Stocks IDFC, Yes Bank, Mundhra Port was available at below IPO prices later on.

NHPC IPO, I read that EPS is Rs 1 giving a P/E of 33-36. I would avoid investing in it. The power companies are currently the darlings of the stock market. This is because there is a power shortage in India. So every MW you generate will find a buyer. 3 years later on when all the power comes online, we would eventually be a power surplus country. That time the tariffs would fall down. So all the projections go for a toss.

IPOs could be treated as a entry point into a company. Get a small quantity allotted, and then eventually add to the stock during market corrections.

Personally, I usually avoid all IPOs.

Saturday, August 1, 2009

Bubble in the Making?

The markets closed firm this week on the back of good quarterly results and good global ques. Sensex made a new thirteen month high at 15732.

The liquidity easing has led to a spurt of new QIPs, IPOs and GDR issues. It seems the lessons of the past have been forgotten with huge IPOs like Adani Power being oversubscribed around 20 times. The IPO size itself is about 2500 crores.

We have the NHPC IPO (size to be about 6000 crores) in August lined up which will further suck up liquidity. The markets will not crash immediately, as it is in the vested interests to keep the markets buoyant till all the money is collected.

The QIP issues are targeting another 40000 crores to be raised.

The primary market sucking out money means the secondary equity markets will not run away from here. The range for Nifty in August may well be 4950-4250 (Sensex 16700-14300).

Nifty EPS is now Rs 221. So on Friday closing we are at a P/E of about 21. A P/E of above 20 signals we are in danger zone and above 23 in bubble territory.

The US GDP contracted only 1 pc as against an expectation of 2 pc. We have the Newsweek declaring the recession over and Obama coming up with a Mission Accomplished statement. We may well be in for a surprise as this recession could be a W shaped recession. I rule out L or U shaped recovery. Only 2 possibilities exist now a V or W shaped recession.

Check my post:

The unemployment rate is expected to rise to 10 pc. This in real terms would mean an unemployment rate of about 15-17 pc.

If the recession continues from here, the sentiment would be more badly damaged than the actual economic fallout. Throwing more money to fix the existing mess caused by liquidity is never a solution. We are entering a season of utmost caution. The triggers for August would be confirmation of monsoons and global cues with the results season out of the way.

I don’t expect any major correction in August but September is a different ball game altogether.

Technically speaking, Vivek Patil speaks of a double diametric formation with a last upmove ongoing followed by a correction of about 10 pc.

The indicators like William%R are all highly overbought, with Stochastic showing a sell signal. The MACD still signals continuation of the uptrend. 4427 would be critical support, with 3 DEMA at 4594, 5DEMA at 4571, 10 DEMA at 4510 and 20 DEMA at 4429.

Resistance for the month comes at 4950 with support at 4050.

One more indication of reversal would be retracement of climb from 4420 to 4671 in shorter time than the time for up move. The up move has taken almost 3 days so far.

Weekly resistance comes at 4730. Trade with caution.