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 – 3 – A Century of Stock-Market History

Posted on August 4, 2019 by Jimit Zaveri under Bibliophile: The Intelligent Investor

We do not have data available for a century in the Indian stock market so that I have done a calculation with available data. All data are taken from BSE India and RBI site.

When we have seen a huge return into the past from the equities then it is not necessary to consider a similar kind of return into the future. Reality is that common stock prices related to the earnings and dividend from the particular companies or basket of companies. If the company fails to deliver earnings and dividend then it is obvious that the company will not deliver a similar return in the future.

This example shows that growth in earnings and dividend has an impact on the price of the companies and basket of companies (Indices). If earning/dividend growth contentiously falling or depressed during a time then prices of the securities also have an adverse impact. So that we can see that during the year range 2011-2019 or 2016-2019, SENSEX has increased more rapidly compared to the EPS growth. Now, either EPS to grow much rapidly or SENSEX has to fall. Or it can also happen that SENSEX can remain in the range till EPS growth does not match to the average return. For matching the average return, either EPS has to grow by 20-22% or SENSEX has to fall 22-25%. This study can provide a similar result with particular stocks.

When the difference between earning yield to bond yield and dividend yield to bond yield start getting lower than we can think that particular stock or basket of the stocks becoming overvalued. This is one of the effective indicators where we can see that when Earning yield / Bond yield has cross 0.67-0.70x then SENSEX has provided us an attractive investment opportunity and when Earning yield / Bond yield has gone below 0.67-0.70x then we need to decide to liquidate our position to the SENSEX in a phased manner.

The stock market does not become less risky just due to advancement to the prices of it. I have seen many people enter into the market or the particular stocks when the price of it starts increasing.

We have seen during the series of Mr. Howard Marks, The Most Important Things that if everyone thinks in the same way then that thinking getting discounted to the price and will not able to get similar kind of returns for the future.

Above mentioned parameter, we can check into the current scenario where real growth of the corporate earnings was not much and the stock market has performed due to the speculative growth. Everyone starts preferring equity as an asset class to invest due to the recent past return. Now, such a scenario is unfavorable for investors. Absent of earning growth does not attract higher valuation for a longer period.

Disclosure – Companies mentioned in the article is 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

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “HAVING A SENSE FOR WHERE WE STAND”

Posted on November 23, 2017 by Jimit Zaveri under BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS

01 WWS

Some category of people does not accept that cycle is unpredictable and largely unknowable, and those people put efforts for predicting the future. Few people ignore the cycle and adopt the buy & hold approach. They do not get aggressive or defensive with their investments in the cycle. Many people have wrongly understood the statement of Mr. Warren Buffett – “Our favorite holding period is forever.”

And the last category which is an appropriate approach for the investment. Such category of people accepts that cycle will occur. Everything moves in a cycle. Fundamental, psychology, prices, etc all moves in a cycle. We cannot able to know when existing trend will go, get the stop and start getting reversed. But we need to be confident enough that trend will stop sooner or later. No trend continuously keeps on going forever.

So that we should try to know where we are standing in the cycle rather than to predict timing and extension of the cycle.

02 WWS

By knowing where we are standing at the cycle, we cannot able to know what will be going to happen in the coming future. But we can prepare ourselves with a probability of occurrence of events.

I can’t change the direction of the wind, but I can adjust my sails to always reach my destination. – Jimmy Dean

Knowing present environment is not much hard compared to knowing future. We can come to know the present environment by observing the behaviour of participants around us, by observing our surrounding environment.

We have to focus on everyday events prevailing to the market. Such events provide us a rough idea of our position at the cycle.

Liquidity

SENSEX TGT

When everyone is aggressive in buying a particular asset then we must have to take care and be aware of the upcoming risk. We should be aggressive in buying a particular asset while everyone is in panic and selling particular assets.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” ― Warren Buffett

We have to look around and think it by ourselves regarding present situations and make a decision that where we are standing in the cycle. What is market participants doing? What media is talking? Such questions need to be answered by looking at situations around us.

SENSEX 2024-2030

03 WWS

When too much money getting deployed into few assets then huge liquidity drives prices of an asset, such price momentum is not due to its actual fundamental. And also at the higher valuation people are ready to buy an asset aggressively. People are ready to buy Rs.100 worth of asset at Rs.200-300-400…. With the bright future expectations.

We cannot predict when huge liquidity gets dry but as a contrarian investor, we can prepare ourselves for upcoming risk.

04 WWS

05 WWS

We need to check which side majority of our answers falls and as per it, we can make an estimation of the present situation. And can able to prepare ourselves for the situations. When a majority of our answers falls at the happy situation then we have to be cautious towards the present scenario and vice-versa.

06 WWS