Nifty PE - few thoughts

Price Earning Ratio (PE)

Range High :  Feb 2000 – 28.47 &  Jan 2008 – 28.29 – Diff 8 years

Range Low :  May 2003 – 10.84 &  Oct 2008 – 10.68 – Diff 5 years

It took 4.5 years to reach next high range of 28.29. while first correction spanned over 3 years, it took only 9 months to reach low of 10.68.

From Oct 2008, it took exactly 2 years to reach another normal high of 25.91 in Oct 2010. From their on, Nifty is in correction mode with PE hovering around 19.95 as on May 26, 2011. Time efflex so far is 8 months. How far this will take….

Will it touch again lows of 10 + as expected in some circles…or will it bounce from here or it will touch usual or normal low range band (indicated in the chart as hold or add zone) and then will start upward journey….before looking for answers, let us go back to the period of October 2008.

1. Interest rates were at its peak…Yield on Benchmark 10 year G-Sec touched 8.43% and gone beyond that peaking at around 9.55 % near about.
2. Close of Lehman Bros
3. Crude at record high of $ 147 per barrel
4. RBI increased key policy rates to contain inflation

It is sort of irrational panic prevailing over all markets resulting in low PE. 

Now coming back to present time as on May 26, where do we stand vis a vis October 2008.

1. Interest rates are climbing but not reached peak …Yield on Benchmark 10 year G-Sec just touched 8.46%.

2. Fortunately no closure of reputed investment banks but we have Greece and Euro Mess vis a vis IMF. .

3.  IMF terms and solution to the economic problems are unacceptable to many of the political masters leading to political confrontation…..in market parlance, political risk.

4. Crude again hovering near about $115 to $120 per barrel with Goldman Sach predicting high of $150 per barrel. Considering MESA problems & associated oil politics, it is not surprise GS coming out with such high projection.

5. RBI indicated preference of containing inflation by sacrificing growth with the result, expectation of regular interest rate hikes to tame so called inflation monster…(is it a monster…no idea..let us believe reputed economists say….my view doesn’t matter)

Let us see the upcoming events

1. Empowered group of ministers meeting to decide on hike in petro-product prices including diesel, kerosene and LPG

2. Industrial Production (IIP) data for April expected on June 11

3. Inflation data for May,  in another couple of days from IIP data

4. Advance Tax Payout on June 15 straining already squeezed liquidity position. (Lately, the government has been borrowing more than planned through short-term instruments like cash management bills and treasury bills. This week, the government borrowed Rs 12,000 crore though long-term bonds and Rs 11,000 crore through treasury bills. State development loans worth Rs 3,800 crore were also auctioned this week.)

5. RBI Policy Review meeting on June 16. Expected to raise key repo rate by another 25 to 50 basis points depending on the situation

So overall the situation is not much different from October 2008. 
Then PE should crash to 10+ levels… right? 
Somehow PE is defying this logic and playing cat & mouse game within the band of 20 – 22. Remember Market bounced again from Friday and the uptrend is expected to continue for a brief period ranging from 2 to 3 days to 2 to 3 weeks as per various technical analysts. Let us take their views just like we did ‘taking our reputed economists view on inflation.’

Then where is it going? ….nowhere, …right? ….that is what, …if u cant convince ..just confuse…, said some wiseman…. & 
Nifty PE seems to be doing just that… !

Read again, 
Three questions on likely move of PE raised …, 
you got the answers in the last para …,
if not read my views below..

Again am not an expert so will go back to basics to understand what is PE ratio. 
Basics give me definition as “Market Price divided by Earning per share is Price Earning Ratio”.

Okay …again EPS is "Profit after Tax divided by Number of Shares".  Fine, it is clear to me now…(is it clear to you…no…then connect to net and  search google or wikipedia for more info and basics).

So the key is EPS …again here it is confusion…historical or projected. Analysts say  it is trading at discount to FY 2012 or FY 2013 which naturally means projected. Then what is the use of historical data….historical data is used to project future profitability & EPS. Then Fair Market Price is arrived at multiples of current PE. 

So we need to travel in future to understand PE movement…is it so….seems to be…let us do it for  understanding academics  clear and better ( who knows one day you may be invited by CNBC to offer your views and in your need to convince or confuse , this may come in handy )…

Let us read again all the gloomy points (seems to be) mentioned above and assess its impact on the market.

1. High Inflation…is it really a threat…no idea…(am not going to get idea) …let us accept as threat. How much it can affect…then how far…

If monsoons arrive as expected with margin of error of 5% and quantum of rain fall matches last year (margin of + or - 10%),  high food prices will come down (as economists expect & say) effecting reduction in food inflation. Then we left with only oil inflation…increase in petro product price will definitely result in increase in oil inflation but proposed increase will be met either by subsidy or by phased out passing on. In effect, impact will be over a period and not immediate. (Also consider top of line implications in financial statements of oil and gas sector companies…)

2. Increased Government Borrowing

It sucks out money from the system primarily because of quantum but underlying positive is when the government starts spending on capital items like infrastructure etc, will enhance growth which in turn absorbs inflation.

Second aspect, Government being quantum borrower, it makes sense for the government to keep interest rates low. That is what it is doing simply by raising short term rates and trying to maintain long yield as far as possible within manageable limits. As long as there is no  tweak in long yields, India remains on growth trajectory with short term pause.

3. Future IIP and Inflation data

 “ Mr.A has gone to jyotishi to get some solution for his problems….jyotishi said you will be in problem till the age of 30 years….Mr.A asked very happily…”after that..” ..Jyotishi said, “ you will get used to it…

It is like that….over the period people got used to inflation….coming back to serious talk, high base effect will make future data for sometime look normal giving an illusion that inflation is being contained….market will accept…am not joking…(have you seen prices coming down once it is raised in the name of inflation….milk has gone up from Rs.18 per litre to Rs.29 per litre within a span 3 years….if inflation data comes down, are they going to reduce the price….no way)

So where is all those (seems to be) gloomy points gone….it is gone,,,poyye pochhu.. poyindi…(not getting meaning….search old amrutanjan advt in youtube….if u get it , kindly share the link here )….

4. RBI increasing rates….

RBI has made blunder mistake in going late….they always remain ahead of the curve but recessionary global economies and uncertain economic environment probably made them to go slow. Anyway, am not critique of RBI and its policy and hence let us come back to interest rate. One can expect upto 100 basis point increase and that will be peaking stage… remember benchmark 10 year yield is at 8.46 %..which is roughly 100 to 125 basis point premium over repo rate. Now if repo reaches maximum of 8.25% then benchmark yield can go upto 9.50%. So peaking is not far off ….is it not right time to pick up fundamentally strong scrips to reap maximum gains…

Now that is what value investors may be doing which is resulting in nifty failing to convince …just confusing us….

Oh I forgot…did I answer question of PE move…no….then read again…

Not getting answers, just ignore  …why bother about something which is confusing …