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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Declining Gold & Crude price changes India Outlook to Positive!

At a time when the news tape was unequivocally shouting for a precarious macro situation of India and the bleak earning profile of India Inc, market rebounded in style and is almost back to square one. Is it a sharp dead-cat bounce or a serious resumption of uptrend from an extremely benign valuation zone is a real issue to debate upon. The solid come-back for the market coincides with the day of Infosys result delivering a surprisingly weaker numbers and its guidance remaining much below the Nasscom projections. The lead for the market has come from the banking sector at a time when all sorts of negative stories from cobra-post to rising NPA etc., etc, were ruling the roost and the negative headlines on it was virtually all around. It has always been the strange habit of the market to behave in an awkward contrasting fashion away from consensus. Since then the banking sector has rallied hard with virtually all the stocks gaining considerable ground. The trigger point was the massive decline in gold and crude oil inadvertently. It was almost clear case of market performance since the fall in the market for this calendar year was primarily on concerns of unsustainable current account deficit and its funding concerns. Now with the sharp fall in gold and crude, it clearly reflects the fact that import bill for crude and gold would come down sharply for this year if the declining trend in these two item continues. 

Otherwise, we, for the past couple of years are running our current account deficit at an elevated run-rate of USD80-90 billion which is being financed by capital flows. The merchandise trade deficit is financed by ITES and remittances to the extent of 65% in 2012-13 which was even higher in 2006 to 2011 to the extent of 85% of merchandise trade deficit. The net oil import bill is at USD110 billion and the bullion import stands at USD45 billion for 2012-13. This has been the primary reason and the central area of concern for the RBI and for India’s macro stability and RBI in the past came up with measures to curb the demand for both. Government also took measures by increasing import duty on gold from 4% to 6% and curtailing subsidy by flexible pricing in petro-products. Though the measures could not have any meaningful impact in the immediate term but the decline in bullion and crude have had serious positive impact on the import bill if the trend persists downward. A 10% decline in gold and oil import could alter the import bill by almost USD15billlion though in percentage terms the CAD shrinkage may not look significant but the trend ofcourse on a YoY basis will be seen heading lower. More dynamic changes to CAD to come with exports getting a boost and this were to happen if the global economy recovers smartly and thereby pushing up demand for Indian products and services. The conventional approach for an enlarged CAD would be to allow the currency to adjust downwards. This may lower imports and increase the demand for exports. But contrary to it, the impact of declining gold may have propelled buyers to come up with their pent up demand and for oil, pass-through in more than 50% of the products for consumption is minimal and hence the compressed prices will have limited impact. Moreover, on the export side majority of it is exported as part of supply chain and hence in such a situation, large depreciation does not escape notice and is very often neutralized by price negotiations. As a result of all these despite of 20% depreciation in INR, exports did not get a boost yet.

For this year, the earnings outlooks in the canvas of Nifty stocks have been painted gloomy. Even for a 15% earning growth in Nifty stocks, 70% incremental growth in Nifty earning to come from Financials, Materials and Autos. This clearly reflects upon the fact that a series of interest rate cut by RBI this year have the potential to boost earnings for the market sensitive sectors & companies which in turn would support markets. At present the interest rate still remains elevated and hence the earning picture doesn’t look healthy. During the course of this year the consensus earning picture which is projected bleak may change with altering macro outlook. Our sense is that lower interest rates would be a major catalyst for changing earning outlook.

As was mentioned in our December 2012 Monthly Insight stating for 2013 to be a year of declining commodity prices and lower interest rates, until now commodities have shown all signs of cooling-off including precious metals, crude oil etc. Recently inflation print and the core inflation continue to head lower is giving a comforting sign and will provide headroom for RBI to cut interest rates comfortably. The RBI lowered the repo rate by 25 basis points on 3^rd May’13 for the third time this year in a bid to help revive growth in the economy. Although, the cut in policy rates by the RBI is not really translating into a similar cut in lending rates of banks. The clamour for the Reserve Bank of India to cut interest rates at its policy review meet on May 3 has been met with a 25bps cut in repo rate at a time when inflation is at its twenty month low at 5.96 percent and commodity & oil prices correcting sharply along with gold.