How Relevant is All Time High for Sensex...

How Relevant is All Time High for Sensex:

As the market is closer to its all time high once again, the moot question which is lingering in the mind of most of us is that whether it’s a herculean task to take out all time high. One must wonder that all time high is just a number and a price point which have nothing more than a psychological relevance. It has almost been six years and Sensex haven’t been able to cross past the all time high. If we compare valuation parameters of 2008 when the market peaked out with 2013, its heartening to note that the valuation parameters at the time when the indices hit all time high was way ahead of fundamentals and today the sanity has prevailed and the valuation metrics have subsided considerably despite the market scaling closer to peak. It has almost been six years and Sensex EPS have had a CAGR growth of 8% therefore valuation metrics have automatically come down whether it is the P/B or P/E. For this six years we have had slowed down considerably and a consolidation phase have been the prime agenda for Corporate India. Difference in valuation parameter at the peak of 2008 and today are starkly different and are stacked up favourably for 2013. In 2013 earning expectation remains extraordinarily depressed despite of a major slowdown for last six years, whereas in 2008 earning expectation were exorbitant because of a growth of 25% CAGR in earnings in the preceding five years prior to 2008.

Period	Sensex EPS Growth (CAGR %)	Sensex Return (CAGR %)	Average GDP Growth Rate (%)
FY1993-1996	45%	21.50%	6.80%
FY1996-2003	3%	-1.60%	5.30%
FY2003-2008	25%	50.50%	8.90%
FY2008-2013E	8%	6.50%	7.30%

P/E multiples expansion was at its peak along with earning expectation in 2008 and now p/e multiples, risk premium and earning expectation have been depressed. So in nutshell, room for expansion in earnings, P/E multiples and risk premium after a six long year of slowdown remains quite high from here on. But the most important thing is that all time high has no relevance in 2013 because of the significant changes in valuation metrics since 2008. Despite of a slowdown Sensex still managed to register a CAGR growth of 8% in earnings albeit at marginal pace and well below the historical mean average. Once we see a phase of greater than 15% CAGR growth in earnings, relevance of all time high would start looking minuscule from the valuation standpoint.

In 2008, the trailing P/E was at 23x while in 2013 it is at 14x despite the market being at same peak level as it registered in 2008.

In 2008, the trailing P/B was at 6x while in 2013 it is at 3x despite the market being at same peak level as it registered in 2008

Dividend Yield at present is at 1.5% whereas in 2008 it registered a low of 0.8%.

Earning yield/bond yield ratio quoting at 0.75 in 2013 which is below the mean average reflects comfortable valuation for Sensex. During the peak of last bull market in 2008 it shot up to as high as 1.40.

Spread of 10 year government bond yield and corporate bond yield narrowing to -0.74 (Mean Spread at -1.2) reflects a significant shift in the risk perception of corporate India. Historically the kind of spread has been noticed in 2004 when corporate India started its upturn in earning cycle which lasted till 2008, after a long dry spell of low 3% CAGR earnings growth from 1996-2003.

Paras Bothra

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