Light at the end of tunnel…But how long is this tunnel, stupid?
India is a secular Bull-Run story! It’s a long only market. I was told by brokers last year asking my firm to put more money in India. Long term India is a Buy…but how long is long...it is becoming longer now…
If DCF wasn’t enough to justify rich valuations…SOTP for conglomerates, MCap to Order Book for capital goods and engineering sector (Mcap to Revenue had become an old school thought), project based valuations (today a 5 year project was announced and in couple of days it was reflected in the price)…and above all The Embedded Value…of 3000-4000 points in Sensex to justify higher valuation… “well if you remove embedded value of 4000 from Sensex (at then 20000), with FY09E EPS of 1000+, you are talking of 1 yr forward PE of 16x ONLY”, for the second fastest (large) growing economy of the world where EPS is growing at >20%, GDP growth visibility of 9% for next 3-5 years, and irreversible growth, INR was going to 38 against USD, it was a Consensus. Even expectations and wishful thinking were monetarily rewarded in the market. To get richer tomorrow, announce a project today. How easily we make Statistical Type 1 error. Now, there is no body talking of FY09E EPS of 1000, GDP of 9%, and embedded value when SENSEX is at below 14000.
There was a premium to greed earlier, now is a fear led discount. At the peak, AUM of a mutual fund company was valued at 11-13%, now nobody is giving even 5%. Buyers for PSU banks were there for 2.0-2.5x book value, nobody buys at 0.8x now-NIM is squeezing, loan growth is slowing, risk-reward ratio is not favorable (the biggest black hole in recommendation).
Please refer to my article “Fear of being left out” – written on 20th Jan, incidentally 1 day ahead of the beginning 2008 crash (On 21st Jan, we had a crash of 10%). My old favored stocks are again preferred now…Infosys, ITC, Ranbaxy (a cracker) and Hero Honda to an extent. Exception is Tata Motors (poor guy, had it spoke of raising capital in bull market people would have taken its price higher!). The stocks that gave a feel of being left out namely JP Associates, Reliance Energy (now Infrastructure), HDIL, Reliance Capital etc-are all down by more than 50-65%. My favorites are up on an equal weighted portfolio basis. Hedge Funds come, they shoot up prices, we follow them and they exit-quite smart breed of investors they are indeed!
Point to Ponder: No brokerage houses have positive view on the market, but all have around 75% of Sensex/ Nifty stocks in their Buy list.
There is a risk to FY09E earnings, but there isn’t any sizable quantification of the risk in terms of EPS downgrade. People are waiting for Q2 results to firm up their view…an Ex Post analysis…another problem…its not an analysis...its a postmortem or may be a step ahead of postmortem. Analysis and projections are done on an Ex Ante basis. Before 6 months INR was on track to consensus 38, now it is to 45. Even global biggies faulted in understanding Indian economy it seems. India is the only BRIC nation that has seen its currency depreciating this year and the largest downgrade of economic growth figure. Brazil is infact up around 15%, thanks to the upgrade of its Sovereign Rating to Investment Grade. Near negative real interest rate in India further poses a threat.
However, India is not the lone one having the problem. While Asian markets had the worst 1st half in the past 16 years, Europe had the worst in the past 22 years, US had the worst in a decade. June was espcially bad for all the markets. I wrote a piece on US going to so called Stagflation in March (Pls read "Does US have what it takes to go into 1970s like Stagflation?), now it is becoming evident every passing day. Unemployment above 6%, inflation scare is back with headline inflation above 4% and Real GDP growth around 0.5% (and let inflation go up higher, it will eat into the nominal GDP, and chances are there where we can see a negative GDP growth, but I wish I go wrong for a noble cause!!!)
Off the topic: We often turn blind to inherent risk when we are jubilant, we raised JP Associates and HCC and now talking of execution risk and risk to order book. Merrill Lynch had price target on Reliance Capital of around INR 3000 (at then price of INR 2500 in Dec 2007), now no body is its taker at sub 950s. We have a tendency of complacency. There was a mail from a Pakistani journalist that Ambani brothers (then worth USD 90bn) could buy all the stocks listed on Karachi…reading which we were so happy that we forwarded that to our friends. At the same time we had PetroChina and Gazprom from our BRIC nations which had capability of buying 50-80% of Sensex stocks.
Surprisingly, twice it happened that an Indian became arguably the richest man on the planet for few days (Azim Premzi-2000/01 and Mukesh Ambani-2007/08), and it was followed by a market crash. And more so, its not a social achievement that the country having around 500mn people with less than USD 2 a day, also having the richest person on the earth. Imagine the ever increasing socio economic divide. Poor people did not get benefit when the going was good, but bearing the brunt when it went bad-all curse to inflation
The USD 2bn sell off by FIIs in June on the top of USD 4bn net sell off by May…interestingly even after they had lost 8% in currency too (besides 20-22% Sensex decline in INR by May 08 end), it seems tunnel is becoming bit more longer everyday. India is a long-short market now-said one brokerage house a with low voice...
If DCF wasn’t enough to justify rich valuations…SOTP for conglomerates, MCap to Order Book for capital goods and engineering sector (Mcap to Revenue had become an old school thought), project based valuations (today a 5 year project was announced and in couple of days it was reflected in the price)…and above all The Embedded Value…of 3000-4000 points in Sensex to justify higher valuation… “well if you remove embedded value of 4000 from Sensex (at then 20000), with FY09E EPS of 1000+, you are talking of 1 yr forward PE of 16x ONLY”, for the second fastest (large) growing economy of the world where EPS is growing at >20%, GDP growth visibility of 9% for next 3-5 years, and irreversible growth, INR was going to 38 against USD, it was a Consensus. Even expectations and wishful thinking were monetarily rewarded in the market. To get richer tomorrow, announce a project today. How easily we make Statistical Type 1 error. Now, there is no body talking of FY09E EPS of 1000, GDP of 9%, and embedded value when SENSEX is at below 14000.
There was a premium to greed earlier, now is a fear led discount. At the peak, AUM of a mutual fund company was valued at 11-13%, now nobody is giving even 5%. Buyers for PSU banks were there for 2.0-2.5x book value, nobody buys at 0.8x now-NIM is squeezing, loan growth is slowing, risk-reward ratio is not favorable (the biggest black hole in recommendation).
Please refer to my article “Fear of being left out” – written on 20th Jan, incidentally 1 day ahead of the beginning 2008 crash (On 21st Jan, we had a crash of 10%). My old favored stocks are again preferred now…Infosys, ITC, Ranbaxy (a cracker) and Hero Honda to an extent. Exception is Tata Motors (poor guy, had it spoke of raising capital in bull market people would have taken its price higher!). The stocks that gave a feel of being left out namely JP Associates, Reliance Energy (now Infrastructure), HDIL, Reliance Capital etc-are all down by more than 50-65%. My favorites are up on an equal weighted portfolio basis. Hedge Funds come, they shoot up prices, we follow them and they exit-quite smart breed of investors they are indeed!
Point to Ponder: No brokerage houses have positive view on the market, but all have around 75% of Sensex/ Nifty stocks in their Buy list.
There is a risk to FY09E earnings, but there isn’t any sizable quantification of the risk in terms of EPS downgrade. People are waiting for Q2 results to firm up their view…an Ex Post analysis…another problem…its not an analysis...its a postmortem or may be a step ahead of postmortem. Analysis and projections are done on an Ex Ante basis. Before 6 months INR was on track to consensus 38, now it is to 45. Even global biggies faulted in understanding Indian economy it seems. India is the only BRIC nation that has seen its currency depreciating this year and the largest downgrade of economic growth figure. Brazil is infact up around 15%, thanks to the upgrade of its Sovereign Rating to Investment Grade. Near negative real interest rate in India further poses a threat.
However, India is not the lone one having the problem. While Asian markets had the worst 1st half in the past 16 years, Europe had the worst in the past 22 years, US had the worst in a decade. June was espcially bad for all the markets. I wrote a piece on US going to so called Stagflation in March (Pls read "Does US have what it takes to go into 1970s like Stagflation?), now it is becoming evident every passing day. Unemployment above 6%, inflation scare is back with headline inflation above 4% and Real GDP growth around 0.5% (and let inflation go up higher, it will eat into the nominal GDP, and chances are there where we can see a negative GDP growth, but I wish I go wrong for a noble cause!!!)
Off the topic: We often turn blind to inherent risk when we are jubilant, we raised JP Associates and HCC and now talking of execution risk and risk to order book. Merrill Lynch had price target on Reliance Capital of around INR 3000 (at then price of INR 2500 in Dec 2007), now no body is its taker at sub 950s. We have a tendency of complacency. There was a mail from a Pakistani journalist that Ambani brothers (then worth USD 90bn) could buy all the stocks listed on Karachi…reading which we were so happy that we forwarded that to our friends. At the same time we had PetroChina and Gazprom from our BRIC nations which had capability of buying 50-80% of Sensex stocks.
Surprisingly, twice it happened that an Indian became arguably the richest man on the planet for few days (Azim Premzi-2000/01 and Mukesh Ambani-2007/08), and it was followed by a market crash. And more so, its not a social achievement that the country having around 500mn people with less than USD 2 a day, also having the richest person on the earth. Imagine the ever increasing socio economic divide. Poor people did not get benefit when the going was good, but bearing the brunt when it went bad-all curse to inflation
The USD 2bn sell off by FIIs in June on the top of USD 4bn net sell off by May…interestingly even after they had lost 8% in currency too (besides 20-22% Sensex decline in INR by May 08 end), it seems tunnel is becoming bit more longer everyday. India is a long-short market now-said one brokerage house a with low voice...
posted by Vikas Maheshwari, CFA at 9:07 PM
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