Now is another golden opportunity in equity market

+91 88 84 00 99 88www. Hornmerchant.comHornmerchant
TM
Making Money More Productive
Now is the Golden Opportunity
in the Equity Market
Sensex is back to 13,700 points!!!
i.e., Sensex @ 24,350 today = Sensex @ 13,700 in year 2009 (May)
Similarly, Nifty back to 4,200!
By Girish Kodashettar

TM
Few months ago (Aug-2013) I said, then was the golden opportunity to invest in the
Equity Market in our Slide Share post (http://goo.gl/DBW5MO). Later, couple of
months ago, I shared a write up ‘Now, is it right time to invest in Equity?’
(http://goo.gl/rrV2v0). Then many people were simply pessimistic about the further
growth in the market in specific and economy in general.
Time has elapsed and things have changed for better and very fast.
All those who were convinced about the idea then, and invested have already grown
their money by 50% to 80% !
Now here is another chance! You can still enter and make lot of money!
Now please don’t be sceptic this time!
Because,
"Bull-markets are born on pessimism, grow on
scepticism, mature on optimism and die on euphoria.”
– Sir John Templeton

TM
Political:
• After long time (25 years!!) India has strong, single party Govt. That mean we will have stable, independent and
un-interrupted Government. Policy decisions will be taken faster and things will move faster.
• Additionally the pro-development & energetic leadership (Mr. Narendra Modi) there are hopes about
accelerated growth in India’s economy.
Macro Economy:
• Most of the developed countries (mainly US and Europe) are out of the global economic slow-down and growth in
these developed countries is also fast picking up. This means we will have higher demand from those
countries for product and service supplies.
• Among Asian countries, India is better positioned to offer better export competitiveness than other
countries (mainly China) because of various reasons including younger-cheaper-knowledgeable human capital,
currency valuation advantage (cheaper / weaker against USD, compared to other major Asian countries’)
• High possibility of Interest Rates coming down drastically (by ~ 1.5% - 2%) in next quarters, over a couple of
years time. This means, companies will get loan for doing business at lower interest rates and hence their margin
will increase and business and industrial activities will gather speed.
• Large basic industries (Steel, Cement, Construction, Mining, Capital Goods etc), which are currently running at
almost half of their installed capacity, are going to get boost and start to function at their full capacity utilization
as soon the new Govt. starts clearing the stuck projects and also by very likely increased Govt. spending on
Infrastructure development. This growth will spill-out to other sectors like Automotive, Logistics, Manufacturing etc,
and gradually to all other sectors; this in turn will lead to higher employment generation.
Now, have a re-look at those phrases in bold red; Aren’t all they ingredients of a bull market?!
Let’s have quick look at India’s current situation

TM
Wow, what a rosy THEORY!
Well, that was a preface;
lets get cracking with numbers.
Because our interest in investing in stock market and benefiting from growth, we’ll limit our
scope to numbers related to stock market, much more specifically to indices.

TM
Today (30-May-2014),
NSE / CNX Nifty is at 7,236
This corresponds to Trailing PE 19.8 / PB 3.4 / DY 1.3
BSE Sensex is at 24,353
This corresponds to Trailing PE 17.6 / PB 2.8 / DY 1.4
At first look, it may look that markets are already at
sufficiently higher level; we will understand how
markets are really priced or valued in the next slides.
If you don’t understand what PE (Price to Earning Ratio), PB (Price to Book Value Ratio)
and DY (Dividend Yield Ratio) are, don’t worry refer the next slide for brief descriptions.
If you know what they are, simply skip the next slide!

TM
PE : Price to Earnings Ratio =
Current Price of a Share
Earning Per Share (EPS)
PE Ratio tells us at how many times (multiple) of
EPS, the market / current price of an equity
share is available for buying.
So, smaller the multiple / PE ratio, more cheaper
the price of the share.
PB: Price to Book Value Ratio =
Book Value of a share (BV)
PB Ratio tells us at how many times (multiple)
of BV, the market / current price of an equity
share is available for buying.
So, smaller the multiple / PB ratio, more
cheaper the price of the share.
Smaller the PE no. better is the investment opportunity
Smaller the PB no. better is the investment opportunity
In case of our study, the Current Market Price and EPS, Book Value and Dividend are considered of
Index (Nifty / Sensex) which is weighted average of all stocks in the index.
For detailed and easy understanding of the definitions and concepts of PE, PB, DY, EPS, Dividend, BV, Stock Index
(SENSEX / NIFTY) etc you can read and learn about them at www.investopedia.com or www.wikipedia.com
EPS, Earning Per Share, is the total net profit earned per share.
Out of this net profit, some portion of it may be distributed to share holders, which is called as ‘Dividend’; i.e., Dividend is the ‘Profit Shared’ per share.
BV, Book Value, of a share is nothing but the Intrinsic (physical) Net worth of the company per share
Index / Stock Index: Stock index is set or bundle of given no. of shares of different companies (say, select 30 or 50) ; each company’s share will have
different weightage depending on it’s ‘Market Capitalization’ (total worth of a company’s all shares). The companies which are part of Index will be the
biggest and most traded in that given category). So, index largely reflects the overall market’ s or that category’s overall and average performance.
DY: Dividend Yield Ratio =
Dividend Distributed Per Share
DY Ratio tells us, how much we are likely to
earn as profit income from the company
whose share we buy.
So, bigger the DY ratio, more lucrative will be
the share.Bigger the DY no. better is the investment opportunity
X 100

TM
To understand the relative valuations of the current
market more clearly, we did a simple study.
We’ve noted the Important fundamental ratios (PE, PB
& DY) of the market / index (Nifty & Sensex) at current
level and then checked the historic values of the same
index at the same values of the fundamental ratios.
So, Let’s have a look at what we found.

TM
PE, PB & DY of Nifty for a
period from 04-May-2009
to 29-May-2009
PE, PB & DY of Nifty for a
period from 09-May-2014
to 30-May-2014
PE (19.8), PB (3.4) & DY (1.3) of Nifty for these two periods are
almost identical
Source: http://www.nseindia.com

TM
So, as it can be seen, 5 years ago,
the PE and PB of 21-May-2009 very closely match to the
values of PE and PB on 30-May-2014.
Now, let’s see where was market (Index) on these dates.
NSE / CNX Nifty

TM
NSE / CNX Nifty
4211
7230
Now PE @ 19.8Then, PE @ 19.8
Source: www.moneycontrol.com
So at the same valuations, Nifty was at 4211 on 21-May-2009 and today (30-May-2014) it is at 7230

TM
Let’s see how is it for SENSEX

TM
BSE / S&P Sensex
Source: www.bseindia.com
*Historic (Archive) ‘DAILY’ PE,PB & DY ratios are not available
for BSE Sensex ; however monthly average ratio’s are available
Monthly Average Ratios*

TM
Now PE @ 17.6Then, PE @ 17.6
BSE / S&P Sensex
13736
24217
So at the same valuations, Sensex was at 13,736 on 21-May-2009 and today (30-May-2014) it is at 24217
Source: www.moneycontrol.com

TM
Now, don’t get confused or misunderstand this info by misinterpreting it so that for the
given (today’s) PE and PB, the correct Nifty index level should be 4,211 and Sensex
index level should be 13,736! That will be a blunder!
The right way to look at it is this: Last time when PE and PB were equivalent of today’s,
then Nifty was at 4,211 and Sensex was at 13,736.
From there both indices have risen to today’s levels (7,223 and 24,217 respectively).
But even today, at these higher levels, indices correspond to the same PE and PB. That
means, stock prices and hence the indices have increased their value to the extent PE
and PB are maintained at the same lower levels. So it implies that, market (and large
number of good quality stocks) is undervalued, the way it was during and just after the
recession period.
From those levels in May-2009, markets have rallied and Nifty scaled 6,300 points and
Sensex crossed 21,000 points to reach the previous record high levels. That means
indices grew by little over 50% from there!
Projecting the same growth now, from current levels, by growing 50%,
Nifty Shall reach 10,800 and Sensex shall reach 36,000 points!!!

TM
Jaws dropped?!

Nifty @ 10,800 & Sensex @36,000 !!
Well, let’s do some ‘Reconciliation’

TM
Let’s look at PE levels of Markets at Previous Peak Time (Nov-2010)
BSE / S&P Sensex
*Historic (Archive) ‘DAILY’ PE,PB & DY ratios are not available
for BSE Sensex ; however monthly average ratio’s are available
Monthly Average Ratios*
NSE / CNX Nifty
PE 23
PE 25.6
@ 21,005 Pts
On 05-Nov-2010
@ 6,312 Pts
On 05-Nov-2010
Source: www.bseindia.com
www.nseindia.com

TM
At present levels (30-May-2014)
Points PE
Nifty
Sensex 24,217 17.7
7,230 19.8
EPS
PE =
Price of Share*
* For Index (Sensex / Nifty), share
price is nothing but it’s level (points)
Earning Per Share (i.e., EPS)
=> EPS =
Price of Share*
PE365
1368
Now, let’s apply this present EPS to the Index Levels we have arrived at earlier
Points EPS
Nifty
Sensex 36,000 1368
10,800 365
PE
29.6
26.3
PE @ Previous Peak
25.6
23
Ref Prev.
Slide
So, reconciliation shows, @ 36,000 Sensex & 10,800 Nifty markets / indices will be
much more ‘costlier’ or over valued than previous peak levels.
So, what will be the Indices levels if they have to be at previous peak’s valuations?

TM
EPS @
Present
(30-May-2014)
PE @
Prev. Peak Level
(05-Nov-2010)
Nifty
Sensex 1368 23
365 25.6
Price
(Point)
PE =
Price of Share*
* For Index (Sensex / Nifty), share
price is nothing but it’s level (points)
Earning Per Share (i.e., EPS)
=> EPS x PE = Price of Share*
9,344
31,464
Indices levels if they have to be at previous peak’s valuations
Nifty @ 9,350 & Sensex @31,500 !
So, that means,
OK! No problem, if you are not convinced,
then be ready for some more maths!
Of course, simple ones.

TM
Now you know what is PE; so far we focused on “Trailing PE” that means ‘past’ PE.
Means, PE calculated on the basis of Past Earnings (Last 4 Quarters or Last Year) of the
companies. We will now focus on Future PE or “Forward PE” to be calculated on the basis of
‘Estimated Future EPS’
In fact this will be the most sophisticated, which also tries to project BY WHEN the projected
level will be reached. However, we need to be careful about estimating future EPS,
otherwise it may be misleading.
We will calculate it with very conservative estimations.
Basically, companies (whose shares are traded on the market and which form the index) are in the business of
making profit. They sell products or services.
Imagine you own one of such businesses. This year you have say Rs. 100 Lakh Sales. And you are trying to
estimate next year’s sales. Assume rate of inflation is 9%. So, even if don’t want / target to increase the sales
next year (which is unlikely) your sales will be at Rs.109 Lakhs just because of inflation. That means you sell the
same no. of items but due to increase in the selling price adjusted for inflation, you will have 9 Lakh additional
sales. Further, overall consumption / demand for your product will increase due to increase in the population
and / or the expansion of the broader market segment you are working in. In broader and very macro level we
call it “GDP Growth” (GDP = Gross Domestic Product = total worth of a country’s goods & services). Let’s
consider GDP growth at 7% (currently Indian GDP growth has bottomed out @ 5% and should increase to 7%
and above). With that your sales and profit will increase by 9+7=16% ‘automatically’. So your sales will
increase to 116 Laks by itself, without you putting extra effort to increase the sales.

TM
Valuation Criterion
End of Year
(Today as Ref.
Point)
Nifty Sensex
EPS
(Growth @ 16%)
PE Price (Point)
EPS
(Growth @ 16%)
PE Price (Point)
@ Current PE Levels1
May-14 365 19.8 7,227 1368 17.7 24,214
May-15 423 19.8 8,383 1587 17.7 28,088
May-16 491 19.8 9,725 1841 17.7 32,582
@ Past 10 Year
Average PE Levels1
May-14 365 18.7 6,826 1368 17.7 24,214
May-15 423 18.7 7,918 1587 17.7 28,088
May-16 491 18.7 9,184 1841 17.7 32,582
@ Bull-Run Phase PE
Levels2
May-14 365 19.8 7,227 1368 17.7 24,214
May-15 423 22 9,315 1587 19 30,151
May-16 491 24 11,787 1841 21 38,656
EPS
(Aclrtd. Growth3
)
@ its best!3
May-14 365 19.8 7,227 1368 17.7 24,214
May-15 431 22 9,475 1614 19 30,671
May-16 517 24 12,404 1937 21 40,679
1: Interestingly, current PE of Sensex is almost equal to last 10 Year Average PE (17.67); which means,
it is fairly valued
2: Assumed that during the bull run, which has clearly started now, PE expansion will happen (in fact,
conservative PE no's are considered here in the computation, compared to actual historic PE levels
(during the past bull runs)
3: In fact, a bull market in a fast growing economy means both Higher EPS Growth (as companies grow
their business bigger and faster) coupled with PE Expansion. Here we've assumed accelerated EPS
growth @ 18% and 20% YoY.
Estimation of Indices Levels based on Forward EPS and PE

TM
Nifty @ 9,700 & Sensex @32,600 !
So, according this method of estimation also, CONSERVATIVLY,
is possible, in 3 years (May-2016)
That’s the evidence that, today market valuations are
more attractive than when Nifty was @ 3,400+ or Sensex
@ 11,400+ seven years ago.
So, what you should be doing now?

TM
1. Markets at these levels with future growth
prospects, the scenario and time for equity
investing is too attractive
2. If you are looking for making good returns on
investment in next 2-3 years, you should be
investing now.
3. If you are not a domain expert in the
investments, please take Mutual Fund Route for
your equity investments. Professional fund
mangers are better qualified and equipped to
fully exploit the available opportunities and
handle volatility in a better way.
4. Actively managed top mutual funds in India,
always have beaten (outperformed) the
respective indices they have as ‘benchmark’;
that means your returns could be more than the
growth in the indices
5. Seek help from Investment Advisors
If you have now
realized and excited to
grab the opportunity,
Consider This
Unfortunately, if you are’nt still convinced, at this point of time we don’t have any more to tell;
perhaps next slide may give you some tips!

TM
If you think all of the
above is ‘nonsense’
and worth to be
ignored, at least don’t
ignore this!

TM
HornmerchantMaking Money More Productive
www.hornmerchant.com

Now is another golden opportunity in equity market

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