WHAT CAN BE A PROBABLE BOTTOM OF INDIAN STOCK MARKET?

Posted on March 28, 2020 by Jimit Zaveri under Investment Philosophy

We have seen a sharp fall in the market these days. Now, everyone has a question that what can be a probable bottom? where we should start buying? Bottom of the market already made? Should we buy or will we have missed out this opportunity? Yes, Nifty has reached to the fair value zone but pendulum never stayed at the middle zone it will go extreme to both the direction. So, we have seen upside extreme and now have to see downside extreme move.

Before starting answering the above questions, here, I am requesting you to read my old article which I had posted on 4^th August 2019. In that article, I mentioned regarding market fall. Please first go through that article because the current article is a continuation of that article.

THE INTELLIGENT INVESTOR – 3 – A CENTURY OF STOCK-MARKET HISTORY

Now, if we analyze current fall then we can say that Indian corporate and GDP has witnessed a limited growth in the past. Also, Covid-19 virus has disrupted the entire world economy. Majority of the economy has started giving a revival package but if we look at the speed of the spreading of Covid-19 and death of the people then it is very painful for us as well as the economy.

Our PM has announced with the 21 days lockdown to fight against the Covid-19. We have taken this step well in advance so that we can able to control the situation, because if the situation will go out of control then we do not have a proper infrastructure for citizens to cure.

I have taken a few data from HDFC Bank India growth outlook 2020, cost of lockdown.

By looking at the above data and havoc of Covid-19 in the world, it is essential to go for the not only lockdown but to declare an emergency in India. Now, let’s go to the economic impact of this mayhem. People can oppose that government of the majority of the economy has started announcing a revival package. But We have to think that it’s not a financial crisis where you pump liquidity into the system and things will start recovering. It’s taking the lives of people so what will change after the liquidity get infused. People try to save life rather use those liquidities. So, disruption can take time to revive. If this problem can worsen it will be led to a financial crisis which is still pending to come. It’s just my thoughts, don’t know what can happen but this thing looking worse than any financial crisis.

If the normal situation has come where growth remains subdued then the market can remain in range but here this difficult situation can hamper the earning badly. we have to understand that our states of India are equivalent of the many of the country where corona has done huge damage. Here, the world economy gets hamper, trade around the world hamper, supply chain get disturbs, corporates have to fund fixed cost, they only can manage variable cost through the lockdown.

Many of the articles and reports indicating towards global recession and as intense as the recession of 1929. I don’t know that will happen or not but I only can pray that such will not happen because it will take many further issues with many of the lives. Let’s not getting into the debate and do some number crunching which is always my favourite.

Current, Nifty EPS is ~Rs.444 so proceed with the calculation based on that. I am assuming current EPS will remain same for FY20 and all degrowth will account in FY21 and FY22 (if the situation will not come to the control then FY22 will also go for a toss).

I have taken the bank rate as an SBI FD rate after the rate cut.

Now, if we look at the earnings yield to bond yield ratio then it has reached at the 1.03x in the current period. If we take same EPS and take that ratio to the worst happen during the 2008 – financial crisis then it was 1.11x so nifty level come to the 8000 but Covid-19 will going to hamper earning growth and might be a new level of earning yield to bond yield ratio can come, which I have taken a range of 1.25 to 1.50 with a different scenario.

If things will be in control in coming few days then might be 5% degrowth can be possible and then market also maybe get stable at the old worst level of earning yield to bond yield ratio – 1.11x to 1.25x. But if things will get more worst then now and continue with coming 1-2 months then 10% degrowth in earning can be expected. I have made a study in S&P500 of USA and in that market earning yield to bond yield ratio has reached around 3x in worst level which I am not considering as of now. If we see that then past falls in the market have accounted for ~50% fall from the top so that that will also come to ~6215 level.

Now, another point is that earnings growth always essential for generating returns in the market. So that market can be remaining in the range till no sign comes for earning growth revival because, on the hope of earnings growth, the market has already run a lot.

I have posted an article on WHAT CAN BE A PROBABLE RETURN FROM SENSEX IN COMING 10 YEARS? a way back and where I have taken SENSEX level after 10 years on worst earning growth of 3.50% came at 43547 on P/E and 57678 on P/BV based. So, if earning growth cannot revive then the market can remain in range for a longer period. But from the current base, we can have a good chance of making a return in the range of 4-7% CAGR in the index overcoming 10 years. Tax cut reform will also aid in earning growth coming forward. We only have to pray that situation will not worsen from here and for that we have to stay at home, stay safe and fight against Corona.

#Stayhomestaysafe #Stayhomesavelives #Fightagainstcorona

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

The Intelligent Investor – 14 – Stock Selection for the Defensive Investor

Posted on November 17, 2019 by Jimit Zaveri under Bibliophile: The Intelligent Investor

For stock selection and for investing for defensive investors, Mr. Graham has mentioned a few criteria –

Adequate size of the enterprise

Mr. Graham has quoted that investment candidate companies should not be too small into the size. As per him, we should not invest in the company which does not have sales and assets less than $100 Mn (Rs.700 crore) and $50 Mn (Rs.350 crore) respectively.

A Sufficiently Strong Financial Condition

II C14 01

We should check the long-term debt to working capital also. Such strength provides a margin of safety to defensive investors.

Earning stability

Earning of the company does not get highly fluctuated during the past ten years. This indicates that a company has a stable business model. The stability of the business model provides safety to defensive investors.

Dividend record

Uninterrupted dividend for at least the last 20 years. Further, we can check that whether company paying dividend through cash earning or through debt, which I have already explained in – The Intelligent Investor 11

Earnings growth

Earning should be grown for the last ten year. We should decide the % of earnings growth, we seek from the business.

Moderate price/earnings ratio

As per Mr. Graham P/E ratio should not be higher than 15x for the past three years of average earnings. Reverse P/E ratio is near to the AAA bond rate, which means 1/15 = 6.67%.

The moderate ratio of price to assets

The price to book value should not be higher than 1.5x. and also, P/E * P/BV will not be higher than 22.5x (15x * 1.5x). it can be possible that P/E can be 20x and P/BV can be 1.12x or vice-versa.

We should not invest in the companies where earnings getting worst though those companies are available at the cheaper valuation. And if everyone thinks similar for an investment opportunity then advantage for a similar investment opportunity will be gone. Similar happens during the FY17 to FY18 to equities where everyone wants to invest in the equities and equities valuation reach at the higher level.

Mr. Graham has also mentioned that we should not put all our eggs into the one basket, diversification protect us, minimize the risk. But diversification should help when we have a stock of quality companies, also over-diversification does not help. If we own the worst quality companies and make diversification then also our winning odds will never be favorable.

These all parameters are important for initial screening, after that we need to make our due diligence before investing in a particular stock. We need to read at least five years of annual reports, if the institution holds more than 60% to particular stock means that it is highly discovered (>15% is much more for Indian companies), and need to put efforts before investing.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

What can be a probable return from SENSEX in coming 10 years?

Posted on November 11, 2018 by Jimit Zaveri under You, Me and Business

I have written on this topic is due to current market fall and fear into the mind of an investor. We are seeing many uncertainties hindering the growth of the economy, rising crude oil prices, commodity prices, fiscal deficit, banks NPA, government expenditure, rising interest rate, the success of GST, structural changes into the economy. All such events will impact the growth of business positively or negatively. If we try to put all such events into different scenarios then we can come to know what can be a probable return from SENSEX in coming 10 years.

For the calculation of probable return, I have taken a formula which is given by John P. Hussman. John P. Hussman is the U.S.A stock market analyst and owner of the hedge fund.

Formula –

Annualized Return (%) = (1+g)(future PE or P/BV / current PE or P/BV)^(1/T) – 1 + dividend yield (current PE or P/BV / future PE or P/BV + 1) / 2

G = Business earning growth, P/E = Price to Earnings ratio, P/BV = Price to Book Value ratio

Return of our investment is based on –

Business Earning Growth – Our investment return will grow if particular business earning will grow. Investment return is directly related with the earning of a business. If business survives for the longer period of time with generating the higher return on invested capital with earnings growth then we will able to earn a decent return from particular business.

Dividends – Dividends comes from the earning of the company. If a company distributes dividends to shareholders with growing earnings, the dividend is an additional return for the shareholders with the appreciation of business value. As per Mr.Buffett, if the company does not have a reinvesting opportunity available or business does not able to generate a higher return than the cost of capital then management should distribute earnings in form of dividends.

Changes in the valuation – the Stock price of the particular business is also affected by the changes in the valuation such as changes into the P/E, P/BV, P/S (Price to Sales) or Market Cap to Sales, etc.

Assumptions –

Dividend yield (%) is assumed to be 0.50% to 1.00%.
Business Earning Growth (%) is assumed 3.50% (a rate, which is half of the current GDP growth), 7% (current GDP growth rate) and 14% (twice of current GDP growth rate). Assuming average earnings growth of various businesses comprises SENSEX.
Future P/E taken as 19x (Historical average of last 20 years since the year 1998), 21x (10% premium on historical average P/E) and 23x (20% premium on historical average P/E).
Future P/BV taken as 3.29x (Historical average of last 20 years since the year 1998), 3.62x (10% premium on historical average P/BV) and 3.95x (20% premium on historical average P/BV).

SENSEX

We can use a similar kind of valuation matrix for the particular business itself. Here, I have also shown valuation calculation of an air cooler manufacturing company of India, I have calculated as I was at the year 2012 and what can be a probable return from particular business till the year 2022.

Stock 1

If we consider actual business performance then sales of the company have been grown by 17% CAGR since the year 2012 to the year 2018. But the stock price has been increased to Rs.2209 (high price and the current price is Rs.967) from Rs.130. This entire return is come to the stock only because of valuation multiple expansion such as P/E, P/BV, EV/EBITDA etc. Similar period has P/E increased to 85x (high P/E and current P/E is 46x) from 23.63x and P/BV increased to 33x (high P/BV and current P/BV is 11x) from 5.84x.

Disclosure – I am not using this valuation matrix in my investment journey till now. This is only one of the valuation matrix and we need to use a different appropriate valuation matrix for reaching to a value range.

Learn matrix from –

http://hussmanfunds.com/wmc/wmc050222.htm

https://www.gurufocus.com/stock-market-valuations.php