SENSEX Trends – Fair Valuation and Improved Earnings
The current rally has added 98% to the SENSEX relative to March 2009 low of 8160 points. The rally is going on for last 5 months, the question is, what is fueling this rally? This rebound will make us believe it is start of next Bull Run. Any prudent investor will try to figure out what has happened since March 2009 that justifies this rally. As always, at hindsight everything makes sense.
With the unprecedented level of stimulus from many different countries, the global economy is showing signs of stabilization. In addition, the rebound of Oil prices in international market seems to give boost to many countries. Accordingly, I believe Indian economy is also showing signs of stability. I think the biggest boost for Indian business sentiment and environment has been the continuity of the pro-reform government at its helm.
Let us look at latest quarterly earnings (relative to last quarter) of the 30 Indian corporations that are included in the SENSEX.
- I compared total income, operational profits, gross profits, net profits, and earnings per share.
- The latest quarter was quarter ending June 2009, and it is measure relative to SENSEX performance for quarter ending March 2009.
- Red indicates negative, Green indicates positive and Yellow indicates no changes in quarter-over-quarter results.
- Table below shows the mapping of this performance for all 30 companies.
- SENSEX Trends – Fair Valuation and Improved Earnings
As you can see in the table, there are more positive attributes than any negative indicators. There are now 10 companies (as opposed to seven in March 2009) that are showing positive results across all parameters, while eleven companies are showing negative results (same as before). In the remaining nine (as opposed to 12) companies are also showing mixed results. As one can observe there is marked improvement in earnings for SENSEX companies.
Assuming that one can use SENSEX companies as a trend indicator for any given sector, the sector trends relative to March 2009 quarter are:
- Capital Goods: turned negative
- Finance: stabilizing
- FMCG: continues to be positive
- Housing Related: turning positive
- Information Technology: turning negative
- Metals and Mining: turning positive
- Oil and Gas: turned positive
- Power: turned positive
- Telecom: turned negative
- Transport Equipments: turned positive
At its low point, the SENSEX PE ratio had reached around 10. With this 5 month rally, the SENSEX PE ratio is now at 20.
I would tend to believe this rally has being fueled by the two aspects viz., (1) positive signs in company earnings; (2) market getting back to the fair valuation after undershooting to PE of 10.
How does it affect individual investor like me?
In simple terms, the buying opportunities have reduced. Many stocks that I have looked in recent past are above my fair value range. If I have to buy them they are at a premium of 15% to 20%. Therefore, I am inclined to hold on to my cash position. Having said that, I believe looking the SENSEX provides only a generic trend. For an average to exists, there has to be companies above that point, and companies to be below that point. So I am continuing to look for opportunities which are below the average point.
indian earnings, SENSEX, SENSEX companies, SENSEX PE ratio, SENSEX returns
Many good points have been brought up in this post. I agree buying opportunities have reduced but there are still some sound fundamental stocks which are undervalued. 2-3 good stocks are enough to have a good portfolio. It is just very time consuming to discover the stocks study them and then value them
Hello Sumayya,
It is time consuming. But then, hard work pays off. And who said, success comes easy
Best Wishes,
Hi,
Good summary and pretty unique way to compare with SENSEX. Since you are value investor does it mean there could be opportunities in Capital Goods, IT, and Telecom?
thank you in advance.
Newbie
Hello Newbie,
yes, it is likely, but not necessarily true.
Best Wishes,
Interesting comparison but must say that sensex is overvalued by 14.2% based on future growth and exoected ROE. Although trend does look positive but has gone ahead of itself and should expect correction.
I just finished SENSEX fundamental valuation estimating its intrinsic value based on fundamentals, if interested can download from
http://www.scribd.com/full/20584628?access_key=key-di0w6tj1vuu7xxhn2f6
Puneet,
Thanks for leaving the comment. Your approach to intrinsic value was a good read. I think any analysis one does needs to be put in proper context of its objective. I tend to believe standalone analysis on few variables does not show a proper picture. Few comments:
(1) My observation is about “fair valuation” and not “intrinsic valuation”. I have mentioned many times on this blog, fair valuation is what I would be willing to pay (which is not necessarily intrinsic valuation).
(2) At the time when this post about SENSEX fair value was posted, SENSEX was in the range of 15000 to 15600. Since then index has moved to 17000. So assuming 14.2% overvaluation on Oct 4, then even at 16000, the overvaluation would come down to 6% to 7%. Does it make sense?
(3) In your valuation approach, you have used certain assumptions about various growth percentages. With those assumptions, I would tend to believe 6% to 7% can be easily be attributed to standard deviation or error rage. Unless you think 14.2% is a finite point without any range.
(4) trying to calculate intrinsic value of the index is very dicey subject. because index have both good and crap companies. Plus the way SENSEX gets revised every year, with additions and deletions, survivorship bias is very critical. I have observed that SENSEX tends to throw out companies with temporary bad performance, only to take it back after few years.
Again, please note, I am not critiquing the growth and ROE approach you have used. I think that is one way at looking at it.
Numbers are just numbers. They do not tell you anything. It is the interpretation in a given context what makes them useful.