Market looks constrained by high valuations

Athough the Sensex is a good way off from its all-time high of 21,000-plus, the index’s current P/E valuation is close to its high of January 2008, which means further gains may be fuelled solely by the  liquidity factor

The jingles of the Sensex hitting 21,000 are being heard once again after it made a 20-month high on Tuesday. However, the only question that arises is: What will drive the Indian markets to new highs? Which are the stocks that are still undervalued relative to the previous highs of the Sensex in terms of the market expert’s favourite tool, the price-to-earnings (P/E) ratio)?

On 1 January 2008, the P/E ratio of the Sensex was 26.10 based on March 2008 earnings.  But no one expected that the market would plunge 64% from a high of 21,207. Currently, the forward P/E of the Sensex is 21. For the Sensex to reach new highs, it will have to rally 20% from the current level which will take the Sensex P/E to over 25. But the question is: Are the index heavyweights still undervalued enough to carry on the index rally? Let’s check.

Among the Sensex-30 stocks, index heavyweights Maruti, Tata Motors, Infosys Technologies, Mahindra & Mahindra, Tata Consultancy Services and Hindalco are much more expensive than they were in January 2008. For instance, the forward P/E of Maruti is 27.10 against 16.55 two years ago. That of Tata Motors is 25.75 (14.50), Infosys is 25.12 (22.37), M&M is 23.98 (19.27), TCS is 23.34 (22.89) and Hindalco is 13.67 (9.24). It is, therefore, unlikely that these stocks will push the market higher.

On the other hand, in 2008, the forward P/E of DLF, Reliance Communications and Reliance Infrastructure were an eye-popping 70.94, 59.09 and 49.69, respectively. These stocks are cheaper now, as is Bharti Televentures. But Bharti is in the same boat as Reliance Communications, badly battered by intense competition in the telecom business. So, it is unlikely that any of these four companies will be able to drive the market higher. Let’s now consider Larsen & Toubro and Bharat Heavy Electricals. Neither of these two stocks is currently cheap. Other index heavyweights like HDFC Bank, Housing Development Finance Corporation, ITC, Wipro and Hindustan Unilever have the same P/E as in January 2008. Tata Power (42.59), Sun Pharmaceuticals (26.14) and Hero Honda (20.69)—three stocks that have only recently been added to the Sensex—are also more expensive now than in January 2008.

The only stocks that are still cheaper than what they were two years ago are ICICI Bank, Reliance Industries, Oil & Natural Gas Corporation, ACC, Grasim Industries and Jaiprakash Associates. Can cement stocks lead the market higher?
While the demand for cement remains strong, there is a problem of regional oversupply. So, all eyes will be on RIL and ONGC. Will the flow of speculative money target these stocks over the coming weeks?

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    1 decade ago

    Stock Market will Crash after Q2 this year, because commodtities risen till date which will take effect in 2-3 Quarter of 2010 which will effect bottom line & CRR cut & FII pull back due to artificial US back on track, Dollar carry trade roll back, $ strengthening, India and US to stop Stimulus. India lots of corruption in Tempting sector Power and Infra. Slow pace of development will make FII lose confidence on india and make them to go to China, Brazil and Terrorist free SriLankha.


    Sensex zooms 128 points, closes at 17,686

    Indian bourses stayed volatile due to fears over a possible hike in interest rates

    Indian markets remained volatile due to fears over an immediate hike in interest rates by the central bank. However, volatility declined following strong comments from government officials. During the day, the Sensex was up 128 points from the previous day’s close, ending the day at 17,686, while the Nifty closed at 5,278, up 46 points.

    Yesterday, we had said that the market would open higher today and it did so. Bourses will open higher tomorrow, but may not sustain momentum through the day.

    Steel Authority of India (SAIL) rose 3% after the company reported a 32% growth in sales at 1.3 million tonnes in December 2009 from a year ago.

    JSW Steel jumped 11% after the company’s crude steel output soared 88% to 14.70 lakh tonnes in the December 2009 quarter over the December 2008 quarter.

    Bharti Airtel rose 2% on reports that the firm had received an approval from Bangladesh’s telecom authority for its proposed $300 million investment in Abu Dhabi Group’s Warid Telecom.

    Dr Reddy’s Laboratories rose 3% after the company said its Balaglitazone diabetes drug had met its primary target in the first of its Phase 3 clinical trials. As per reports, Balaglitazone reduced blood glucose levels over a period of time in the study conducted on 409 patients.

    Maruti Suzuki India fell 2% on reports that Shinzo Nakanishi, managing director, had said that exports will be hit next year by removal of incentives in Europe. He also said that there would be lower off-take from Nissan for exports as a result of the removal of incentives. He further said that the company aims to keep operating margins at 10% in fiscal year 2009-10 but profitability would be impacted by a rise in raw material prices and a rise in the yen.

    As per the EPFR global funds tracker, emerging market equity funds posted a record $64.50 billion in inflows in calendar year 2009, helped by record flows into the BRIC countries, comprising funds in Brazil, Russia, India and China. The Chinese economy’s return to robust growth also boosted Asia (excluding Japan) equity funds, which posted record inflows of $19.10 billion. Emerging market bond funds attracted record inflows of $8.20 billion.

    According to the finance ministry, direct-tax receipts during April-December 2009 rose 8.51% from a year earlier to Rs2,50,000 crore. Corporate-tax receipts were up by 13.47% at Rs1,67,000 crore, while income-tax paid by individuals declined by 0.41% at Rs83,178 crore, it said.

    On Monday, Kaushik Basu, chief economic adviser to the finance ministry had said that the government does not need to tighten monetary policy now and risk stalling a nascent economic recovery as inflation pressure was mainly caused by high food prices. He also said that Asia’s third-largest economy was likely to return to 9% growth in the fiscal year 2010/11, after topping 7.5% in the current year to end-March.

    Mr Basu said that India’s high savings and investment rates would help sustain the recovery and an annual economic growth rate of 10% was possible within a “couple of years”.

    As per media reports, C Rangarajan, the prime minister’s economic adviser, said that liquidity tightening may be needed. However, an adjustment in policy interest rates is not warranted at the moment, he added.

    The Reserve Bank of India (RBI) is set to hold its quarterly monetary policy review on 29 January 2010. The central bank is widely expected to tighten cash reserve ratio (CRR) requirements for banks, with economists divided on when the central bank will raise policy rates.

    According to latest RBI figures, total loans, including food credit loans to Food Corporation of India for food-grain procurement and non-food credit (all other loans) amounted to Rs29,41,293.07 crore as on 19 December 2009. This represents a sequential growth of Rs34,028 crore since 27 November 2009 compared to a growth of Rs7,698 crore in the whole of November 2009.

    The Union government has allowed duty-free import of raw sugar to tide over the domestic production shortfall. In the 2008-2009 season ending October 2009, domestic sugar output fell 42% to 15 million tonnes, causing retail sugar prices to more than double. At present, in retail stores, sugar is being sold at Rs42-Rs43 a kg.

    During the day, Asia’s key benchmark indices in China, Taiwan, Hong Kong, Indonesia, Japan, and Singapore rose by between 0.04%-2.09%.

    On Monday, 4 January 2009, the Dow Jones Industrial Average gained 156 points while the S&P 500 and the Nasdaq Composite gained 18 points and 39 points respectively.

    As per US media reports, the ISM’s gauge of manufacturing showed growth for a fifth straight month, rising to 55.9 in December 2009 from 53.6 in November. Participants shrugged off the bi-monthly construction spending data that showed a slightly steeper-than-expected 0.6% monthly decline for November. However, in premarket trading, the Dow was trading one point higher.

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    Godrej Properties to raise up to Rs3,000 crore for expansion

    Godrej Properties plans to raise around Rs3,000 crore through debt or equity to fund its expansion plans over the next two-three years

    After its Rs462-crore initial share sale, real-estate developer Godrej Properties Ltd on Tuesday said it plans to raise around Rs3,000 crore through debt or equity to fund its expansion plans over the next two-three years, reports PTI.

    "We plan to raise Rs2,000-Rs3,000 crore over the next two-three years to fund expansion plans," Godrej Group chairman Adi Godrej told reporters on the sidelines of the company's listing ceremony in Mumbai today.

    The company was looking at various options to raise money, including the qualified institutional placement route, Mr Godrej said, adding that the promoters will dilute stake from the current 86% in the event of a qualified institutional placement (QIP).

    Godrej Properties is currently undertaking several projects across 10 cities, which are at various stages of development, Mr Godrej said.

    Moving ahead, the company expects to become a major player in the affordable housing segment, by offering housing units in the range of Rs25-Rs30 lakh.

    "In the period ahead, we will see affordable housing picking up strongly in the country. We are very committed to play a significant role in this segment," he said.

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