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.

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

L&T Finance is coming out with a NCD issue. The issue opens 18^th August and closes September 04^th. 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.

Option I II III IV Interest Payment Quarterly Semi-annual Cumulative Semi-annual 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.) 1,000/- 1,000/- 1,000/- 1,000/- Face Value (Rs.) 1,000/- 1,000/- 1,000/- 1,000/- 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 9.85% 9.85% 9.95% 10.50% Tenor 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

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.
http://economictimes.indiatimes.com/articleshow/4879356.cms
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
http://www.equitymaster.com/5MinWrapup/detail.asp?date=8/14/2009&story=5

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:
http://images.creditwritedowns.com/2008/06/dow-1928-1932.png
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, http://yelnick.typepad.com/
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.

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.

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:

http://money-manthan.blogspot.com/2009/05/u-v-w-or-l.html

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.

Picking up the thread from last time, I move on to Jim Rogers.

Jim Rogers is unique in the sense he has traveled round the world twice once on a motorcycle and later in a custom-made Mercedes.
He is amongst the few investors who have actually traveled the world twice in search of pastures for investment.
He had started the Quantum Investment fund with George Soros which gave a return of 4200% (You read it right) when the S&P return for the same time was 42%.
Jim Rogers discovered stocks in an Eastern European economy bought them cheap, popularized the country amongst Western Investors and then got out after making a killing.
His daughter has a Mandarin tutor because he believes the future in the East. He had made a very famous statement few years back " In 1807 you should have been in London, 1907 in New York and 2007 in Asia"
He was bullish on Sugar and Gold when no one was bullish. He believes Gold has a very bright future. At the time he was bullish on gold was available for Rs 5000 for 10 gm and was considered a dead investment (Only my dear friend Taran has been bullish since then)
He believes India does not have the same potential as China and may break up in next 30-40 years.( I believe the opposite may happen. China breaks up and India pulls ahead).
Dictatorship does not work always.

Jim Rogers is bearish on the USD and one of his famous quote is

The dollar can go down to zero.

Our Central Bank will keep on printing money till we run out of trees.

He is obviously in the camp of bearish on USD, bullish on commodities especially gold.
Jim Rogers writes a blog which you can visit at:

http://jimrogers-investments.blogspot.com/

His book, The Investment Biker is a very good read.

Masters of Investing: Peter Lynch

Lets take a break from focusing on the markets and have a peek at the Masters who built fortunes in the markets.
As and when time permits, I would try and post about the greats of Investing.

Peter Lynch

Peter Lynch is one of the masters of the modern era of investing. He built up a career in Fidelity, the world's largest mutual funds.
He has written 2 Best-selling books, "One up on Wall Street"and "Beating the Street". These books are a must read for any investor in the markets.
He has a simple investment philosophy which can be imitated successfully by anyone. It is one of the greatest myths of investments that to be a successful investor you have to be a financial wiz kid.
Peter Lynch believes in keeping your eyes open and see what is selling in the markets. every Christmas he used to go to the malls with his daughters and see which item was selling like hot cakes. That would be his starting point for zeroing on to the scrip.
He talks about the "circle of competence" - or know what you own. Each one of us work in different professions. We may be knowing what sells in that industry.
To put it in Indian context. Around the period 2002-2003, Bharti Airtel mobile connections were selling the most. The share was at a throwaway price of Rs 50-60.
UTI Bank was setting up ATMs all over the place. It was growing aggressively.
1 more example is of Deccan Aviation. It was available for a long time at Rs 60 and almost whole of India was flying Deccan.
Even now, if you see every 1 out of 2 car in India is a Maruti. It comes out with new models which even in these days have a waiting list. It has been a Market leader for 25 years now.
Young India visits Malls. They spend a lot in the malls. Disposable incomes are rising. Pantaloon is a market leader in this segment.oung India wants to buy houses for living. The number of people taking home loans is rising. Check out the market leader in this segment.
Amul is the most visible brand we see. unfortunately, its not listed, else it would have been the bedrock of any portfolio.

The Peter Lynch model is just the starting point. Once you have that, you have to look at the EPS and Promoter capability.

Peter Lynch philosophy of investing makes it a simple, common sense approach to investment. I would reccomend one reads his 2 books. Simply facinating.

At Crossroads Again

It was a spectacular rally this week. We bounced off 3918 and are at 4374 in no time.

So where could we head from here?

Fundamentally:
Results are pretty decent. TCS results beat the street. They have tightened the Operational efficiency. In plain terms, cost cutting rather than new orders.
For me, the most significant result was that of IBM. IT looks to have arrested the downward spiral. When the recession ends IT will bounce back the strongest because of pent up demand. The companies which make use of recession induced belt tighteneing will be the ones which will prosper more. Infy and TCS lead the way.Infy too had increased profit margins.
Larsen Order Book size was smaller than expected. They have a sufficient order book to execute. Not a matter of concern.
Monday has the RIL-RNRL hearing in the Supreme Court. That will set the trend for the week. Chief Justice of India will head the bench hearing it, KG Basin Gas is the key to India's economic success and this needs a speedy resolution

Technically:
If we see the elliot waves and take this entire as a down move
we have Wave 1 down 4693- 4143
Wave 2 up 4143- 4484
Wave 3 down 4484-3918
Wave 4 up 3918 - 4390

Now wave 4 should have ended at 4267. In extraordinary cases, it can extend upto 80 pc to 4370 with margin of error of 2-3 pc.

This means we are at crossroads.

Also, 4484 - 3918 tooks roughly about 6 sessions. Faster retracement means trend has changed and the above countis invalid. This means Monday-Tuesday we should cross 4484.

The monthly pivot is at 4375 and we cross this 4609 else 4058 - 3825.

So, all 3 methodologies suggest we are at crossroads.

Astrological:

Lets see how the eclipse plays out. Thanks to Natasha for the below link:

http://hogueprophecy.com/predictions/?p=387


India is better placed than other economies because of domestic demand. P/E of 15 at EPS of 800 would suggest 12K is ideal for buying. Closer to 15K risk reward starts veering more towards the risk part.

Markets keep throwing buying opportunities. The trick is to keep cash in hand and keep holding.
Holding shares for 5-10 years at least make people rich.

1 way of doing it is the Free of Cost concept. Suppose you buy 100 HDFc Bank at Rs 1000. When it goes to rs 1500 sell half. (Depending on market conditions)

50 shares cost you Rs 500 now. Again, when market dips buy 50 shares to make your shares 100 in number.

Every year, you will get 1 exit and entry point. So at no point, you have no shares and your cost keeps coming down. Once it comes to some ridiculous low price and is blue chip stock, keep it and forget it. The dividends will pay you big time.

The Road Ahead?

It was a tumultuous week for the markets. The largest weekly loss since October 2008.

The budget kicked it off by not living up to its expectations.

Fundamentals:
The key trigger for further rally was the Union Budget. It has disappointed sorely. FIIs were net sellers about 2 weeks before the budget also. Budget gave them fresh impetus to sell.
The budget is out of the way and the 2 next triggers are Monsoons and Q1 results.

The monsoons at best this year would be average. This will impact rural demand and also cost the government in relief packages. The fiscal deficit of 6.8% is already quite high.

Q1 results will not be spectacular. Infy has already toned down expectations or rather not made great noises. Ironically in the history of Infy, this is the first time employee strength has actually gone down.

This does not bode very well for consumption or consumer led demand.

Fundamentals dont point to a rally in the immediate future. There may be a small technical bounce though.

Technicals:

The much feared Head and Shoulders pattern seems to be coming through with targets of 3600-3800.
Also, as per Elliot, we would now be in a corrective of the whole upmove from 8047- 15600. Retracement could come to 11823, 10932 or 12714 on the sensex.
This could last for about a month or so.

Astrological factors:

We have the solar eclipse coming in on July 22nd and lunar eclipse around August 6th. Astrologically, markets tend to fall around this period. There is athe famous Putz crash window.

here is an ineteresting link:
http://yelnick.typepad.com/yelnick/2009/07/astrological-fireworks-in-stocks.html#more

Global factors:

The US markets seem to be flattening and seem to be in a no hurry to go anywhere. Economic data is also mixed pointing to a flat to negative bias.

Conclusion:

All the above factors point to a flat to a negative market for next 3-4 weeks. Lets see how things pan out. For now, it remains a traders paradise.

Expectations kill the Budget

The news channels hyped up the budget and raised expectations to sky high levels.

The Budget was a good one considering the time the government had to prepare it.

It was not good considering the expectations set out by the Economic Survey.

Removal of FBT, GST roadmap, Commodity Tax roll back all are good signs.

As the FM pointed out budget is not the only forum for reforms.

One more good signal was that the government is not going to let stakes in companies fall below 51 pc. This clears all the speculation on disinvestment.

The next triggers for the markets are the monsoons as well as Q1 results. Q1 results should be as per expectations.

Monsoons remain a cause for worry.

To add to it, the benchmark 10 year bond yield has crossed 7 per cent. This will make borrowing more expensive for the corporates.

I feel the markets may not run away from here. Let us keep watching how things pan out.

The market has now changed into a sell on rallies market from a buy on dips market.