Tuesday, 8 October 2013

Valuation of the Market At Present. Is It a Bull-Run..?

During the time of peak bull run in 2007, the Nifty index was trading at 23-27 times earnings. From 2005-2007 the index was trading at 15-17 times its earnings. Now, in 2013, the index is again trading at 15-17 times earnings but the index is very near to its historical high as we have already witnessed Nifty crossing the 6000 mark a couple of times in the recent past.

So, what should we make of this valuation now? Is the market at its peak because it is near its historical highs? Is this a correct time to enter or have we lost a valuable chance? What can these figures tell us about the market status now and how should we interpret these numbers correctly?

Just taking the numbers at face value gives the impression that the index may be at a high. But a deeper analysis is required to form a correct picture. Let’s look at some of data to form a basis for our interpretations.

P/E Valuations Comparison
July 2013 CNX Nifty : 17-18 
CNX Pharma :  43-46.5 
CNX IT :           17-20.5 
CNX FMCG :  30.5-42 
Aug 2013 CNX Nifty : 15-17 
CNX Pharma : 42-46.5 
CNX IT :          19.5-21.5 
CNX FMCG :  33.5-37.5 
Sep 2013 CNX Nifty : 15-17 
CNX Pharma :  43-46 
CNX IT :           21.5-22.5 
CNX FMCG :   34-39 

The year 2011 data is given below for comparison:
July - Sep CNX Pharma :   25-30
July - Sep CNX IT :           17.5-24
July - Sep CNX FMCG :   28-32

On the basis of the above data, it can be clearly seen that the market is giving exhaustive valuations to sectors like IT, Pharma and FMCG and hence these three sectors have now become market drivers. Whereas other sectors like capital goods, Infrastructure, Cement, Auto, Heavy Engineering including Banking are not attracting deserving valuations. Except for the chosen few who are currently enjoying high valuations thus giving them some immunity from the domestic economy, the other sectors are not attracting good valuations right now.

Market Polarisation :

In the past five years, the index companies in various sectors have grown. Their free-float market cap has increased over the years and due to this the weightage of these companies and sectors in the index has changed accordingly. Sectors like IT, Pharma and FMCG are now commanding life-time high P/E ratios but sectors like Banking which have equally grown in the past five years are having a P/E of 10-12 only even though they have doubled their EPS. This is due to the high domestic inflation situation and low GDP growth.

We can thus form a picture of the market where only a few sectors/companies are driving the index due to their higher weightage and a broader sectoral participation is not present. Hence, the present valuations do not represent a true bull due to lack of broader market participation.

Conclusion :

Looking at all the sectoral P/E ratios independently we can say safely that the index, when trading below P/E of 13 is cheaper.

It can now be interpreted that a cyclical reversal of the present downturn will present an opportunity for re-rating and higher valuations of all participants. Sectors like IT, Pharma and FMCG which are even now trading a bit costlier will remain in higher ratings in the future when the true bull run phase sets in. However, sectors like Banks, Cement, Capital Goods, Metals etc. can offer more safety margins and cheap cost now and can be used to build a long term portfolio but with lighter exposure and good timing. All in all, now is a time to pick good stocks which can give you lifetime returns.