September 12, 2016

Nifty PE above 24 - Historical Trends

If you read our posts over the last few quarters you would be just reading one theme - Nifty valuations are stretched and that it is not a good time to invest for the long term. We waited for a correction in valuation levels or a growth in earnings but they never came! Now as we speak, the Nifty valuations have crossed PE levels of 24! And at the same time, the earnings growth has stagnated to 0% (+/- 1%). This means that the investors are now paying 24x earnings with no growth yet and expecting that growth in earnings will come.

Stats don't lie

Added to this is the fact that interest rates and yields on bonds are at historical lows all across the globe. Take the case of India where a 91 day T-Bill is yielding around 6.56% which means that a post tax return from these bonds is 4.6% for the investors. Across the world, the borrowing rates have managed to stay at extremely low levels and that has caused the returns from fixed income instruments to fall dramatically low. The bond prices have rallied to new highs and the institutional investors are flushed with a lot of funds at cheap interest rates and they are looking at investment opportunities across the globe. When the Government bonds are giving a return of 4.6% post tax, investors won't mind getting a yield of 6% from equities, so how much returns are equities offering?

Central Bankers across the globe have kept rates LOW

At a PE of 24.3, the yield is close to 4.11% - Lower than the safest assets class. But there is another catch! The expectations of these investors over the next 12 months are:

1. Interest rates will be cut by the RBI over the next 12 months by around 0.75% and thus the yield on the government bonds will also fall down to about 4% after tax

2. Earnings will grow at 12% and the Nifty's forward PE at an expected EPS of Rs 408 and current level of 8,800 (Approx.) is 21.56. This means the yield works out to 4.63%

This we have seen from the point of view of an Indian Investor. The FII's see India as a market which is offering a 4.6% expected yield on equities and 4% on the safest asset class! Also, if they invest in bonds now the price of bonds is expected to go up as interest rates come down. All these points have caused a tsunami of inflows across all the asset classes. When will this party end? Noone can predict. Everyone is expecting it to end when FED hikes the rates or USA presidential elections, but we know that everyone is ALWAYS wrong on the street. If you are invested for the long run then it is time to be cautious. If you are trader then it is the best time to be with the trend and make use of the momentum. If you swear by FD's, then it is the last good time to invest and get in that 7% p.a. return  as this is expected to fall over the next 12 months.

No stopping this BEAST!

In the past, there have been 4 instances when the PE of the Nifty crossed the 24x mark and the duration for which the index managed to stay above these levels is:

1. 70+ trading sessions ( 3 Months )
2. 70+ trading sessions ( 3 Months)
3. 50+ trading sessions ( 2.5 Months)
4. 1 session

There is a very high probability that the index will for the next 2-3 months trade above the 8650-8700 levels and in the mean time go on to make new highs and touch PE levels of 25-26, maybe even 28! But what are the hazards of investing at such stretched valuation levels? You can read our previous articles to understand this:

1. July 2015 article
2. January 2016 article
3. May 2016 article

To sum up our views: We were right in the past as Nifty corrected to 6800 levels in Jan and Feb but we have been fuming at times as we continue our equity light and debt heavy portfolio just to see equities rally and give mind boggling returns! However, we have performed at PAR with the Nifty, thanks to the 10%+ returns we are getting from bonds and the equity exposure of our portfolio has managed to give the balance required to be at par with the index, if not out-perform. We are cautious, we believe that this is NOT the time to INVEST for the long term in equities but we also believe that predicting WHEN the rally will end is out of anyone's reach. This is a traders market with a second thought - Thanks to the momentum. And yes:

Tezi mein sabka bol bala, mandi mein sabka moo kala

When in a bull run all are right, when the bear strikes - Everyone's face is BLACK. 

July 31, 2016

Bank Nifty - Interesting Observation

From a high of 20,900+ levels Nifty Bank fell to lows of 13,500 levels over one year and since then it has recovered most of the losses. In terms of retracement, it has retraced alomst 78.6% of the fall in half the time it took to fall.

Nifty Bank Weekly Chart

In the above chart which is of a weekly timeframe, you can see that 19000-19300 levels are very crucial on the Banking index for these reasons:

i) It is a critical retracement zone,
ii) It is a resistance zone price-action wise,
iii) There is an inside bar formation near this resistance zone

Now, if the index manages to break above 19,300 and give a closing above that zone then bulls can sigh in relief. If the index breaks below 18,550 on spot levels then we could see a major correction set into banking stocks. This could be a strong trend-reversal indicator; this week will be very interesting in terms of price action and could decide the trend for the coming months.

Also, it is well known that in bear markets the prices take half the time to retrace their losses. The pullbacks are sharper and stronger and the fall is slow and long. Do comment your views and let the trading community know of the same.

Note: Nothing in this article should be treated as an advice to trade. DalalStreetBulls or Raghav Behani do not take any responsibilities for any losses incurred due to taking positions based on the inputs provided in this report. We encourage our readers to do their own due-diligence.

June 01, 2016

Tata Motors: Zooming Ahead?

Tata Motors - Weekly Chart
Tata Motors has given a breakout from a double bottom formation and looks set to head higher to 560 levels and higher. At current levels of 449, it can be added and averaging, if possible, can be done if the stock corrects to 420 levels. This is our "Tekno-Funda" pick and thus we have a look at the fundamental factors too in this report.


  • For the Q4 of FY 15-16, the sales stood at Rs. 80,684.41 crores vs Rs. 72, 256.40 crores in Q3 of FY 15-16 and Rs. 67,777.72 Crores in Q4 of FY 14-15
  • The operating profit margin stood at 14.09% when compared to 12.63% in Q3 and 12.21% in Q4 of last FY
  • Excellent performance based on increase in sales of Jaguar, Land Rover as well as volume growth in medium and heavy commercial segment in domestic markets
  • There has been a decrease in both long term and short term debt in FY 15-16 vs FY 14-15 which means lower finance charges to the company
  • The company trades at a P/E of 10.98 and P/BV of 2.16
  • The company is giving a good ROE of 23%
We believe the company can head higher and see PE expansion. Tata Motors trades significantly lower on the PE scale compared to it's peers in the industry. This is a positional trade intended to be held for a few months only as of now.

Can Messi help improve sales in domestic market?

May 27, 2016

Nifty above 8000 - Time to sell?

Yeh Kaha Aagaye Hum? (Where have we come)

Nifty Spot Weekly Chart
Technically Nifty looks set for an upmove after breaking out from a year long range as shown in the chart. Also, the breakout above 8,000 levels confirms strength in the index. Whats interesting to note is that IT and Pharma have under-performed in this upmove. If these sectors too start moving up, the momentum will get very strong. At the current levels, 8300-8500 also look very much possible.

But what do fundamentals say? Is this rally sustainable? How to construct a portfolio at this point of time?


Historical Nifty EPS
The EPS we have available is standalone. Consolidated EPS is different, so the the PE calculated will also be a standalone PE. The EPS is calculated based on the weightage of every company in the index and their reported standalone earnings in preceding 4 quarters.

We have seen 2 strong growth phases in earnings. The 2003-2007 phase and then 2010-2013 phase. We are seeing a repeat of the 2008-09 phase when earnings growth fell. The last one year, the earnings have failed to grow and are stagnant in 360-370 range. Consider this, in early 2015 they had touched a peak of 393.77! As on 27th May, 2016 it is 359.96 which shows a fall in earnings. This means negative growth rate! When the earnings are not improving, then on what basis is the market going up?

Optimism. Hope that things will improve and earnings will catch up with the market.

PE Ratio:

You can't trade based on PE ratio but it can be used as a barometer to estimate the medium term trend of the market. PE is the Price to Earnings ratio and is calculated by dividing the price by EPS. Nifty's historical average is 18.68 and that is considered as a fair value generally. Let's have a look at the P/E chart.

Historical Nifty PE Chart
At current PE levels of 22.66, Nifty valuation is expensive. If we consider a stagnant/negative growth in earnings then the valuation is VERY EXPENSIVE. We can say that the market is over-priced at this level. So will the market crash?

PE is not a technical or short term forecast ratio. It says what the status is. Yes, market is overpriced and we expect valuations to cool off eventually but the market tends to stay overvalued for a long time as the wave of optimism lasts long. Nifty in the last 24 months has touched PE levels of 24 twice and we can expect the current rally to go till that valuation again. It can go till 24-26-28 and stay here for quite sometime. This means we can expect a short term rally of 30% also! And at these levels the rally is very fast. So shorting the market will be folly.

When the market is showing 20% to 25% growth in earnings, we can say that a PE of 22-24 is discounting 1 year forward earnings. But when the earnings are not growing at all, then the market is hoping for a rise in earnings. Even if earnings start growing, it won't grow at 20% now itself. So the market is wildly optimistic and irrational at the moment. When the market is at such levels, people are so optimistic and scared of losing out on profits that they rule out any negatives.

We have seen PE of 25+ only in the dot-com boom of 2001 and the 2007 bull market peak. Considering that there is nothing that will spark such optimism we feel that the market may head till 24-25 maximum which translates to 9000 at the most. ( PE of 25 multiplied by current EPS of 360).

But does this mean that the entire market is heated?

Is a crash coming?

A correction in the index usually is seen with a correction in the overall market. Suppose we see that Nifty has corrected 15%, is there any sector or stock that goes up significantly in this period? Rarely and in special circumstances only. All good stocks are also beaten down which gives a great opportunity to buy them at lower levels. 

The current P/E of few sectors based on their indices are as follows:
  • Nifty Bank - 23.43
  • Nifty Auto - 35.90
  • Nifty Energy - 11.31
  • Nifty Financial Services - 19.48
  • Nifty FMCG - 35.67
  • Nifty IT - 18.97
  • Nifty Metal - 22.33
  • Nifty Pharma - 44.31
As you can all sectors except Energy are trading at really high valuations. However, in every market there are stocks that are fundamentally strong but have under-performed the index and are fairly valued. You have to identify them and have patience as you invest in them. When the market falls, the fall in them is lesser.

How to build portfolio as these levels?

PE Table

The above table shows the returns from Nifty at different PE levels. We are currently in the PE range of 22-24 and investing at these levels has given a NEGATIVE return of -8.4% over 1 year and holding for 3 years you get a meagre 1.35% CAGR. This shows that unless you invest now and hold for 5 years, you won't be getting good returns. This is applicable to equities and equity funds also. So it is better to shift money from equities to other assets. If not completely, then a very less portion of your portfolio should have exposure to equity. The BETA of your portfolio should be as close to zero as possible.


DalalStreetBulls clients get proper portfolio allocation guidance help apart from long term stock picks. We are soon coming out with reports on safe assets to park your funds for 6 months to 1 year when market is at HIGH ALERT zone. To know subscribe or know more about our services click here.

Remember: When the market is going up, a crash looks impossible and our brain is so dipped in optimism that we just can't think of 15% to 20% lower levels. But history is evidence that post high PE levels, the markets have corrected significantly.

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