Food Inflation

Combined food inflation stood at 9.14% for July 2014, significantly higher from 7.96% recorded for June 2014. For rural and urban areas, food inflation was 9.56% and 8.32%, respectively, in July. Inflation in vegetable prices was higher, at 16.88% in July, compared to 9.07% in June. Inflation in fruit prices was 22.48% in July, while pulses were dearer by 5.85% year-on-year. Inflation for cereals stood at 7.45% and inflation for milk products was 11.26%. The price rise of non-vegetarian items, such as eggs, meat and fish, was 7.68% in July compared to 8.27% in June 2014. 

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Sensex in bubble zone? Not at all, by this valuation metric
With the market shooting up vertically to all-time highs, is it time to be fearful that a top has been made? Not, by a very important valuation metric 
 
The S&P BSE Sensex and the NSE CNX Nifty are currently trading at their all-time highs. The Sensex has breached the psychological 27,000-mark and the Nifty has breached the 8,000-mark. Valuations too, have shot up compared to the past few months. With the market hitting newer highs and valuations inching higher, investors fear whether the market is entering a bubble zone. Are these fears validated or just plain ‘bubble’ talk? 
 
Over the past year, the Nifty has gained 46.19% as on 3 September 2014. While all major global indices have been trading in the black over the past year, this is the highest return over the year compared to other global indices. The US Nasdaq which gained 31.09% and the Indonesian IDX Composite which gained 28.25% were the next best performing global indices after the Nifty and the Sensex. This would make one wonder, whether the price-level of the Nifty and Sensex has reached a peak.
 
In terms of valuation, the price-to-earnings (PE) of the Nifty has grown by 32.63% to 21.22 times from 16 times over the same period. That means earnings have contributed approximately 14% to this growth. The long-term average of the Nifty PE works out to 18 times. However, the PE of 21.22 times is still 18% below its peak of 25.19 times seen in October 2010 and 24% lower than the peak of 28.29 times seen at the beginning of January 2008. The PE data is as reported by NSE, based on the 12-month trailing earnings. The problem is that past earnings are not always very a reliable guide to market valuation. 
 
Moneylife looked another valuation metric, the price-to-sales ratio (PSR). PSR was first used and popularise by KenFisher in 1984 in a book called Super Stocks which became a huge best-seller. To get the PSR, you have to divide a stock’s market-cap by its total sales. This would help you identify stocks that are selling cheap relative to sales.
 
The importance of PSR as a measure of value cannot be overestimated. The most popular measure of value is price/earnings ratio or P/E. Fisher argued that there were major drawbacks to an earnings-based valuation measure because earnings, even of good companies, can fluctuate hugely from year to year. Replacing equipment or facilities, extraordinary income and losses, or write-offs on research and accounting, deeply influence reported earnings. To Fisher, the drawback of P/E was obvious. Also, while profits can be manipulated easily (because it is a small and residual figure), it is hard to cheat on the reported sales figure in a major way. As Fisher puts it, “Price Sales Ratios are the most powerful single valuation method which I am familiar with. They are not well known, less well understood, and seldom used within Wall Street. They work much, much better than price-earnings ratios.”
 
So where is the Sensex as per PSR? We calculated the quarterly PSR of the Sensex over the past 15 years. According to this metric, the Sensex is currently quoting a PSR of 2.88 times. At the peak period, in December 2007, the PSR was 4.29 times. As the market crashed, the PSR fell to a low of 1.99 times in March 2009 and then it went on to hit a peak of 3.09 times in September 2010. So, even as Sensex is 4,000 points above the level of November 2010, PSR is lower today.
 
 
 
In December 2011, the PSR fell to 2.06 times when the Sensex then had fallen to around 15,500. Since then the PSR has not moved much until March this year. From March 2014 to now, the PSR has increased from 2.22 times to 2.88 times as on 1 September 2014.
 
Considering the average PSR, which works out to 2.19 times, the current PSR is approximately 31% higher, but still below the previous bubble high. Nothing in the market, of course, is hard and fast but at a PSR of 2.88, Sensex is not cheap but it is not horribly expensive either. 

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COMMENTS

shrinivas

2 years ago

They keep dishing out these valuations and absurd theories each time the indices rise and fall.
The only reason they rise and fall is because of excess liquidity or scarce liquidity !

REPLY

pravsemilo

In Reply to shrinivas 2 years ago

Have you read the book mentioned in the article?

And where on earth do you have excess liquidity now?

Ronit

2 years ago

SURE IT IS A BUBBLE ...coz u just check currency is 60 bucks pump IT STOCKS ...banks are moving like inflation is not a problem....ITS CALLED LIQUIDITY samethign goes with dow jones...u create paper money it will explode ...but when this time it crashes there will be no one left to buy

sasirammenon

2 years ago

Sure,it is a bubble.It can explode at any time,money manipulation is the key and not the fundamental growth.Within days you can see an explosion.Beware of it.........

Suiketu Shah

2 years ago

Very intelligent piece,well done.Agree 100%.Super analysis.

Santosh Kanekar

2 years ago

1. What is interesting is how the lines have significantly diverged in the past 3 years ... what does it foretell?

2. The current run-up is primarily due to IT and Pharma which have dollar denominated sales. The dollar rate has significantly moved from the period in the chart. I wonder how the chart would look if the chart was dollar denominated. This is important coz foreign funds look at dollar returns not price index

Nilesh KAMERKAR

2 years ago

There are too many people predicting a crash. Anytime you feel like selling your shares . . .

Just slip into a nearby cinema hall. Cinema tickets wont cost you much but can surely shield you from committing costly mistakes.

DHARMESH Sampat

2 years ago

Good analysis and eye opener !

tapan datta

2 years ago

I simply Love Money life.It is lucid and almost accurate. A lot of thanks to Moneylife Team. T.K Datta.

Nifty, Sensex will be subject to selling pressure – Wednesday closing report
Nifty will make attempts to make new highs but will come under selling pressure
 
We had mentioned in Tuesday’s closing report that NSE's CNX Nifty can hit 8,130 on Wednesday and that the market looks stretched and is due for a pullback soon. On Wednesday the benchmark crossed this level twice, marginally. It managed to stay above it for almost half an hour but soon gave up gains and closed near to the day’s opening.
 
BSE S&P Sensex opened at 27,128 while Nifty opened at 8,111. Sensex moved in the range of 27,067 and 27,226 and closed at 27,140 (up 121 points or 0.45%), seventh day of closing at a new all-time high. Nifty moved between 8,092 and 8,142 and closed at 8,115 (up 32 points or 0.39%). The NSE recorded a volume of 97.70 crore shares. India VIX fell 0.41% to close at 13.3925.
 
Among the other indices on the NSE, the top five gainers were IT (2.41%), Realty (2.16%), Metal (1.00%), Midcap (0.98%) and Infra (0.78%) while the top five losers were FMCG (0.67%), PSU Bank (0.43%), PSE (0.27%), Finance (0.23%) and Dividend Opportunities (0.19%).
 
Of the 50 stocks on the Nifty, 23 ended in the green. The top five gainers were Coal India (3.96%), Infosys (3.22%), Bharti Airtel (3.17%), Wipro (2.75%) and TCS (2.56%). The top five losers were Gail (2.25%), ONGC (1.72%), IDFC (1.57%), Bhel (1.50%), Bajaj Auto (1.47%).
 
Of the 1,618 companies on the NSE, 760 companies closed in the green, 792 companies closed in the red while 66 companies closed flat.
 
The latest survey released by Markit Economics showed that growth in India's service sector activity slowed in August 2014. Adjusted for seasonal influences, the headline HSBC India Services Business Activity Index posted 50.6 in August, down from 52.2 in July.
 
India is among the worst- ranked countries when it comes to taxation and inflation burden on economy, as also in terms of the negative impact of crime, terrorism and health hazards on business environment, a WEF report said today. Out of 144 countries analysed by the World Economic Forum, India ranks 133rd in terms of inflation, 130th for taxes and 131st for starting a business. 
 
Oberoi Realty (15.24%) hit its 52-week high today and was the top gainer in ‘A’ group on the BSE. Eicher Motors (8.46%) too hit its 52-week high today and was among the top two gainers in the ‘A’ group on the BSE.
 
JSW Steel hit its 52-week high on Tuesday. It corrected today giving up gains and appeared among the top three losers (2.44%) in the ‘A’ group on the BSE.
 
Coal India (3.40%) was among top two gainers in the Sensex 30 pack. The Coal Ministry has sought comments from various ministries, including finance, on the draft Cabinet note for implementation of performance related pay of Coal India employees, aimed at removing anomalies in salaries and wages of nearly 19,000 CIL officers. In March, Coal Mines Officers Association of India had gone on a day’s strike to press for implementation of performance-related pay and the new pension scheme. They called off their strike on the second day after the management assured them that it would push for early placement of their demand for performance-linked pay before the Cabinet. The strike hit the company’s output by 4 lakh tonnes. Coal India has a workforce of 3.49 lakh employees.
 
ONGC (1.48%) was among the top three losers in the Sensex 30 stock. With the intention of getting higher price for natural gas, it said that it needs $6-7.15 to break-even on gas it plans to produce from its most prolific KG basin block. In its submission to the four-member panel of secretaries working out a new gas pricing mechanism, it said in 2013-14 its cost of gas production, after including return on capital, came to $4.43 per million British thermal unit, higher than the current price of $4.2.
 
US indices had a mixed closing on Tuesday. The Institute for Supply Management said its US manufacturing activity index rose to 59 in August, the strongest since March 2011. July construction spending was at its highest level in over 5-1/2 years.
 
Separately, US construction spending staged a strong rebound in July, rising by the largest amount in more than two years. Construction spending rose 1.8% in July, the biggest one-month gain since May 2012, the Commerce Department reported Tuesday. It followed a 0.9% decline in June, the largest setback in a year.
 
Except for KLSE Composite (0.15%) and Seoul Composite (0.02%) all the other Asian indices closed in the positive. Hang Seng (2.30%) was the top gainer.
 
The HSBC China services Purchasing Managers' Index (PMI) rose to a 17-month high of 54.1 in August from 50 in July, HSBC Holdings PLC said today. The HSBC Composite Output Index posted at 52.8, up from 51.6 in July, and signalled a robust rise in activity levels. Furthermore, it was the strongest expansion of business activity in 17 months. China's official non-manufacturing activity slightly recovered in August, with the sector's purchasing managers' index (PMI) rebounding to 54.4 in August from 54.2 in July. European indices were trading in the green. US Futures too were trading higher.

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