ML sectoral trends

Shares of printing & publishing companies soared 19%, while shares of hotels companies and office equipment companies advanced 11% each. Stocks of steel companies, garments companies and steel products companies declined 4% each. Stocks of airlines companies fell 3%.

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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.

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