Timing the Sensex - Invest or Hold?

Sensex

28075.55

728.73

(2.66%)

Jan 15, 16:00

Every investor invariably spends time thinking if this is the right time to invest, the only differentiator being the theories basis which the final conclusion is arrived. Some investors look at value, technical charts, political trend, business sentiment or even resort to astrological advise! While there is no conclusive evidence that one theory overpowers the other in terms of success of predictions, it is my  belief that any explanation basis some historical data or evidence holds some ground in the world of uncertainty. For believers in historical data, this write-up may well turn to be an interesting and conclusive story.

Most value investors look at PE ratios closely to see if the PE corresponds to growth and value proposition. Looking at Sensex PE ratio for the last 10 years shows that the peak has been between 20-22. The India growth story in terms of GDP has hovered between 5-8% over the decade and this may well have been factored the way Sensex hit the peak and troughs.

Most predictions for GDP for the current year seem to be pegged between 6-6.5%, which presents an optimistic environment. However, looking at the current Sensex PE of 19.2, we may well believe that the upside is capped to 10%. Post the repo rate cut of 25 basis points by RBI, Sensex rose by 700+ points to close at 28K. Given the positive environment (weakening oil prices, stable political situation and positive earnings growth), Sensex may well hit an all time high this year. Purely, going by all time high PE trends, Sensex at 30K looks possible at the moment given the macro economic environment. While we seem closer to the top, every crash has followed a boom story. So, my suggestion for readers would be - Invest for now, Hold for the future and stay put till 30K!

Sensex Historical Ratios

Year	P / E	P / B	Dividend Yield
2012-2013	17.19	2.95	1.57
2011-2012	17.85	3.46	1.47
2010-2011	20.04	3.46	1.13
2009-2010	21.05	3.85	1.12
2008-2009	12.68	2.47	1.92
2007-2008	20.18	5.19	1.07
2006-2007	19.84	4.95	1.28
2005-2006	20.05	4.92	1.29
2004-2005	16.05	3.82	1.69
2003-2004	18.55	3.5	1.81
2002-2003	13.74	2.14	2.28
2001-2002	17.55	2.57	1.85
2000-2001	19.72	2.82	1.56
1999-2000	22.69	3.71	1.08

*Source - bseindia.com

Uncommon Sense - Dhoni as India Cements VP

India Cements

BSE

Feb 01, 17:00

87.85

1.60 (+1.86%)

VOLUME  56,649

PREV. CLOSE

86.25

OPEN PRICE

86.20

OFFER PRICE (QTY.)

87.85 (5)

Well, if you go back to yesteryear's especially when India won the first Cricket world cup in 1983, no one ever thought on aggressively using cricketers brand image to promote company brands. Media and Entertainment has progressed so much that managements are constantly thinking to innovate.  This one decision announced by the BCCI chief and India Cements Vice Chairman took me aback!!

Dhoni, arguably one of most successful captains India has seen, is crowned as Vice President of a cement company with great south Indian presence! Its hard to say if this is in better interests of the org or maybe vested interests of the individual. But just the idea of getting one of the most expensive brand ambassador at a lower price amuses me!!!

What would be Dhoni's role in a cement company? He probably does not even understand the business, but he can be a great brand ambassador of a company which has so far been seen as a sluggish performer in comparison to some of the large caps in Cement industry. This apart, I somehow find it strange with marketers willing to bet their money on the 'popular' individuals! Would someone buy a product because Dhoni is endorsing it? Would you ever buy cement bags from India cements just because Dhoni is employed there? People would probably buy a "Lux" soap because its marketed by leading actresses in the country. This is probably the first time a cement company is banking on popular brand ambassadors. But the mere idea of getting an expensive brand at a cheaper price looks extremely innovative. Just going by the thought, BCCI and India cements Vice Chairman Mr. N Srinivasan has played a master stroke. My sense is that this move may actually not do any good for the company in the long run...

Will Dhoni play the next world cup - well, I don't want to comment if this move is actually with vested interest. But, ultimately at the end of the day, performance counts!!!! Finally, should you buy India cements because Dhoni is in? Answer is no, buy a company for its fundamentals and not for the news it is making! With interest rates going down, cement companies also would trigger a fresh demand cycle. India cements may well be part of this and will be a good bet for the short term. Buy at lower levels with a target of Rs 100 within a years time. Fundamentals indicate a clear buy - PE of 11.6, BV of 132, Dividend yield of 2.2% and a sales growth of 20% YOY.

Mathematics of Valuation - Is it time to Invest

• SENSEX
  20039.0475.01
• NIFTY
  6064.4025.20
• USD/INR
  54.320.36

Its really interesting to predict markets for most analysts. I find them strange, because most of these TV analysts aren't really accountable for what they say. But I must say, this time on, they seem to be right in their view that the markets seem bullish. Here's why I think so! 

Look at the below table showing PE, P/BV and Dividend yield for Sensex over the years. Every time Sensex has reached a PE of 20+, there has been a correction(logically so!). What surprised me and got me wrong was that Sensex did reasonably well in 2012 though indicators weren't bullish. At this point, I see a good story emerging for the short term(1-2 years). One, Dividend yield for Sensex stocks is at one of the best we are seeing for the last 7 years at 1.53. Secondly, PE is just around the levels we saw in 2005. As most analysts, I would say PE is not the sole indicator of bullishness. However, for now, this looks attractive for a 15% return.

Manufacturing and some of the banks which haven't done well over the past year interest me at this point. Stay off IT stocks though they may run with market sentiment. I for one, don't want to participate in their fiscal management story which are seemingly less bullish. Look at the top line of top IT companies over the years, we are no where near to what we saw during the IT boom. Why should these companies command a PE of 15+? Is there any logic?

I will separately post some of the stock ideas for the year shortly.

Indices :SENSEX

Period : Year 2000 to Year 2013

Year Open High Low Close Price/ Earnings Price/ Bookvalue Dividend Yield 2000 5,209.54 6,150.69 3,491.55 3,972.12 24.48 3.81 1.14 2001 3,990.65 4,462.11 2,594.87 3,262.33 17.60 2.51 1.83 2002 3,262.01 3,758.27 2,828.48 3,377.28 15.22 2.30 2.14 2003 3,383.85 5,920.76 2,904.44 5,838.96 15.02 2.49 2.14 2004 5,872.48 6,617.15 4,227.50 6,602.69 17.26 3.28 2.01 2005 6,626.49 9,442.98 6,069.33 9,397.93 16.21 3.94 1.58 2006 9,422.49 14,035.30 8,799.01 13,786.91 20.18 4.75 1.35 2007 13,827.77 20,498.11 12,316.10 20,286.99 22.25 5.32 1.10 2008 20,325.27 21,206.77 7,697.39 9,647.31 18.22 4.20 1.29 2009 9,720.55 17,530.94 8,047.17 17,464.81 18.08 3.42 1.43 2010 17,473.45 21,108.64 15,651.99 20,509.09 21.71 3.67 1.12 2011 20,621.61 20,664.80 15,135.86 15,454.92 19.21 3.43 1.32 2012 15,534.67 19,612.18 15,358.02 19,426.71 17.14 3.08 1.63 2013 19,513.45 20,126.55 19,508.93 20,039.04 17.91 3.04 1.53

Year gone by - 2012

SENSEX 19444.84  121.04 (0.63%)NIFTY 5908.35   38.25 (0.65%)

I for one chose not blog or do anything substantial with the markets during the year. For one, the markets started of on an expensive note with sideways movement in most months. The year brought in a mix of political events with not so bullish sentiments. For someone who intended to make a fortune this year, it would have been outright disappointment!

Returns - BSE Sensex
YTD :	25.82%	1 Week	1.10%	1 Month:	1.40%	3 Months:	3.60%
6 Months:	14.40%	1 Year :	23.60%	2 Year :	-2.90%	3 Year :	11.70%

However said, Sensex did well to clock 26% returns this year with traditional heavyweight stocks like RIL hardly doing much. Telecom went through a serious of turmoil and uncertainties. Fundamentals aren't compelling even now for a long term investment. Markets are still not ripe for a 40% return scenario, for someone with a 10-15% return expectation, this would probably be a good market in medium term.

This year would probably see me blogging much more frequently with fruitful ideas. I hope you may have benefited from my recommendations in the past. The sell call on Orchid Chemicals at Rs 302, buy call on Power Grid at Rs 100, Repro at 128 etc. Having said this, this year is personally upsetting looking at the way we are ending it. Look at the events marking India this year: FII confidence moved southwards after 2G spectrum scam(if one may call it so). What happens to investments done by some of the new telecom operators like Uninor, MTS etc is yet to be known. Anna Hazare moved an independent motion on anti-corruption. But what made things worse is the gang rape of a 23 year old girl in national capital. Anger, tears, emotions flowed across Indian families post the demise of the victim. 

India needs serious branding and makeover with stronger policies and actions across issues of importance. And this should start with a stronger primary and secondary education system. I hope government and the people at large wake up and unite to build a new India of prosperity where people get a sense of security, safety, improved standards of living and a cleaner today free of systemic rot!

Sell NIFTY

NIFTY

04:00 PM | 09 Dec 2011

4,866.7

Change:-76.95Change%:-1.56%

Open:4,870.75Prv. Close:4,943.65

Today:  4,841.75

52-Wk:  4,639.10

4,918.35

6,181.05

I mentioned in my post on Oct 2, 2010 on an impending crash and expensive valuations. I also stated that this would probably be the longest of the downturns, with no clear indications of up move. I also predicted that the last leg of bear run is yet to come and probably will not be anytime sooner. Looking at the Sensex charts, this would well be the last leg of fall and this is not going to end anytime sooner. With global economy showing no indications of bullishness, weakening rupee and rising interest rates aren't the best of the facilitating factors for bull run to start.

A weak rupee though may aid the results of companies focused on exports(IT, Pharma majorly), in my view, one needs to look at business fundamentals of these companies. With global clients wearing a cautious outlook, there is barely any growth in spending. Margins are thriving on currency or external factors than core business fundamentals. Given this, it would take a while before the next bull run begins. Governmental control in de-controlling currency fluctuations may not help in the long run.

Lets wait for the last leg of fall - this would be as much irritating with range bound movements as is now.

Saying Goodbye!

The world lost one of the great tech guys in history - Steve Jobs, someone who took the world by storm through his innovations. Just some time back, I was listening to his 2005 speech at Stanford - this was absolutely brilliant lessons taught in just over 15 min!!!

One of the best ways of saying "Goodbye" to the world - well, I would borrow a leaf of learning and say "Live like its your last day and do all that you would as though there is no tomorrow"!

Infosys (NSE) 2989.50 -316.70 (-9.58%)

What a day in history - two key people who have managed to do what no one else can dream have decided to make way for the younger generation. K Dinesh and Mohandas Pai move on after having built a legacy. While the markets gave a thumbs down to the stock, its important to note that this move has more to do with internal emotions and very little to do with business.

When individuals of this nature are associated with a company which has managed to have a dream run delivering consistent growth year after year, its a proud feeling of achievement which ticks along. Next in line would be the founder NRN, who would retire by August '11. The business remains unaffected by such changes - my own experience validates the quote "Org is always greater than the individual". I personally believe IT is a mature business now and hence you can not expect a 100% YOY returns out of a stock like Infosys. Infosys would continue to deliver 15-20% growth YOY in line with FMCG businesses. As it enters the big league to compete with global majors like IBM and Accenture, its important to be logical and conservative in terms of return expectations out of a stock like Infosys. Enter the stock if the expectation is 10-15% returns and if the view is long term.