Monday, September 10, 2012

SENSEX: BULLS’ RALLY

While Dalal Street is flying high on a bull run, downside risks weigh heavy calling for a correction in short term

Worse, the ongoing high growth trend is also not a very clear one as in-depth analysis of the forecasts suggest that growth is not across the board. It is restricted to selective sectors like Materials, which alone is expected to provide 45% of the incremental profit. As a matter of fact, expected profit growth for Nifty companies excluding the Materials sector (where growth forecast for companies like Tata Steel is pegged at as high as 39%) is just 12%. In such a scenario, it’s really difficult to say for how long the recently sparked market euphoria will continue.

Another aspect which served as a catalyst in increasing investors’ faith on India Inc. was certainly the superb industrial production figures of July released in September. In fact, the Sensex breached the 20,000 mark within a couple of trading sessions after the Central Statistical Organization data showcased 13.8% rise in IIP (revised to 15.6%) for July. In a way the sharp rise from 5.8% in June to 15.6% in July boosted the predictions of a GDP growth of over 8.5% for the year, making India an attractive investment destination for the European and the US investors where growth is still at a meagre 1% - 2%. But then, with the release of the IIP data for August, the upbeat sentiment seem to have taken a big dent now as the Sensex on October 12 rolled down 136 points after the CSO informed that IIP growth in August declined to 5.6%. Such an erratic behaviour on part of industrial production coupled with ongoing high inflation of around 10% is not only hampering the country’s growth forecasts, but also ensuring a volatile stock market.

But then, corporate outlook and economic outlook are not the only problems for the Sensex, its valuation too is a critical aspect that needs correction. Going by reports, while the P/E ratio of the Sensex represents a 10% premium to its historical 10-year long-term average at 15.8x (times) expected EPS for FY12, in terms of price-to-book value, valuations are at a 15% premium at 2.9x FY12 expected book value. Moreover, RoE (return on equity) at 17.8% is lower than the long term average of 18.7%. Bulls may still try to justify that the valuations are lesser than January 2008 and are realistic, but no one can deny that these factors should not be ignored for long if IIP keeps fluctuating this sharply jeopardizing the country’s growth targets and thus distracting the FIIs.

Over the last couple of quarters, the Indian stock market might have recovered on strong grounds of economic recovery, but the 2,000 point spark of last month was purely backed by FIIs. And going by the track records, a bullish trend on FIIs buying is certainly the worst thing to rely on. More so, when the market is riding high on forecasts and the realities are at the doorsteps to be factored in. So today, undoubtedly, even the best of the experts, though bullish about the Indian stock market in the long term, are cautioning investors about a choppy time in the short term with a downside risk of 15-20% correction. In other words, cautioning about phase out of the September effect.


Source : IIPM Editorial, 2012.
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