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Commentary, Stocks

India Inc. Slows Down, and Nifty is Not Yet Attractive


So it seems like the view on the street is that the Nifty and Sensex have been pounded down and are now at very attractive levels to buy, and perhaps some of us retail investors should jump in now. And if you have lost your 20% in this fall, don’t worry because sometime the market will recover from here. The India story in intact, we have great growth, this is a short term blip, the overall case is fantastic for India and so on and so forth.

The truth is that we are slowing down. We need to slow down, as I’ve said before, so we can take the time, consolidate and then grow. I’m not saying one or two months, I mean two-three years. Still, the first signs of slowing down are in, in a way that people haven’t quite looked at.

On a pure Earnings-Per-Share level, growth is down to 13% year-on-year. Whoa, you say, what are you talking about? Here’s the data.

One year ago, on 7 Feb 2007 the Nifty P/E was 20.32, and Nifty was at 4224 – gives us an EPS of Rs. 207. On 7 Feb 2008, the P/E was 21.9, and Nifty was at 5133, so EPS is Rs. 234.

EPS growth, the indicator we need to see how our top stocks are growing, is Rs. 27, or 13% growth in the last one year.

Note that carefully – we are paying nearly 22 P/E for what is 13% growth in the last one year. And we considered that really fast growth, so what will happen next year as global economies slow down? Will we continue to pay such high P/E for leaders that are collectively growing at less than 15%?

P/E is affected by number of shares – and there have been some huge share offerings by ICICI Bank and Tata Steel. SBI rights is coming up too. Now you can argue that on absolute earnings we have grown around 19-20%, but that doesn’t matter as much as EPS growth – if growth on earnings can only be obtained by issuing new shares, we are going to be in for some serious surprises. Also four companies are yet to announce earnings (Cairn, ABB, HLL and VSNL) but I doubt that will impact index EPS that much.

Let’s do a scenario. Let’s say in the next one year we grow another 13% on EPS, and our P/E comes down to a level of say 15. The projected Nifty value? 4000. This translates to a Sensex value of around 14000.

A tough scenario: EPS growth at 10%, and P/E moves to 12. Nifty will then be at 3088.

Note that this is not now, this is one year from now! We have a long way to go from here if we are looking for true “value”, and even the above scenarios aren’t the worst cases. Both are extremely likely and the point of “buy” should be for a Nifty value of around 3500. (Sensex should be around 12500 then) A further drop of 30-40% from current levels. Value is still a while away, and while I shy away from predictions, this is a likely enough scenario to keep as a sanity check when someone says “there are bargains in the market”.


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