Is Sensex Cheap?

I was wondering if Sensex P/E truly reflects the picture next year. I took an estimate of profits of thirty Sensex companies as below:

Company	Net Profit FY2010E	Free Float	Free Float Profit
ACC	750	0.55	412.5
Bharti	8500	0.35	2975
BHEL	3500	0.35	1225
DLF	3500	0.25	875
Grasim	1800	0.75	1350
HDFC Bank	2650	0.85	2252.5
Unilever	2500	0.5	1250
Hindalco	2000	0.65	1300
HDFC	2800	0.9	2520
ITC	3750	0.7	2625
ICICI Bank	4250	1	4250
Infosys	6000	0.85	5100
Jaiprakash Associates	650	0.55	357.5
L&T	4000	0.9	3600
M&M	1250	0.75	937.5
Maruti	1500	0.5	750
NTPC	9000	0.15	1450
ONGC	15000	0.2	3000
Ranbaxy	750	0.4	300
RCOM	7000	0.35	2450
RINFRA	1750	0.65	1137.5
RIL	23000	0.5	11500
SBI	12500	0.45	5625
Sterlite	4000	0.4	1600
Sun Pharma	1500	0.4	600
Tata Motors	1250	0.55	687.5
Tata Power	1000	0.7	700
Tata Steel	5000	0.7	3500
TCS	5500	0.25	1375
Wipro	4250	0.2	850
Total			66455

The free-float market cap of Sensex today, i.e. 26 May 2009, is 981352 Crore at an index level of 13589.23. The P/E of Sensex in June 2010 with these estimates comes out to be 981352/66455 = 14.76, neither cheap nor expensive, and EPS of 920, a growth of 25% from today's EPS of 13589.23/18.47 = 735.

There are going to be equity dilutions from at least four companies that I know of, Reliance Industries (due to merger with RPL, dilution around 4%), Tata Steel (due to conversion of CCPS to equity shares on 1 Sep 2009, dilution around 15%), HDFC Bank (due to preferential allotment to HDFC at the time of merger with CBoP, dilution around 6%) and Bharti Airtel (due to merger with MTN). This will not add anything to estimated profits but may add to market cap and thus will increase P/E ratio.

I might be too conservative in estimating the profits, especially for capital goods, cement and auto. Let's wait for next June when I will revisit this post to see whether my estimates were near or not.

Ten Years of Nothingness

HUL's share price over the last 15 years show Ten Years of Nothingess. Remember that this happened after a lot of outperformance compared to Sensex between 1979 when HUL was listed with an IPO price of INR 20 and 1999 when its share price touched INR 3000 (pre split of 10:1 in 2000). The company has a bonus history which shows that 1 share of face value INR 10 became 6.4 shares of face value INR 10 between 1979 and 1992 and those 6.4 shares of INR 10 became 64 shares of INR 1 because of split. Thus anybody who held 1 share of INR 20 @ IPO in 1979 was holding 64 shares of INR 300 in early 2000, i.e. INR 20 became INR 19200 in 21 years, a CAGR return of 38.68%, of course without counting dividends. Those 21 years of outperformance was followed by Ten Years of Nothingness!!!! Even if you consider the lost decade of 2000-2009, the CAGR return at today's price of INR 230 amounts to 24.6% over 30 years, better than Buffett. Should an investor complain?

Indian Executives Dumping Stocks - Part 2

We have seen some more dumping over the last three days from Ambuja Cements 1, 2, 3, 4, and 5, Jindal Steel and Power 1, HDFC Bank 1 and HCL Infosystems 1.

Promoters and Directors seem to be confused

I am talking about Reliance Infrastructure. On the one hand, the company is announcing buy-backs followed by more buy-backs. On the other hand, the company is announcing private placement of shares followed by private placement of shares. The first buy-back is announced upto a maximum price of INR 1600 and then the second was upto a maximum price of 700. The maximum amounts were INR 800 Crore and 700 Crore respectively. The first warrants allotment were around INR 1800 for 4.3 Crore warrants, amounting to INR 7830 Crore. The latest allotment is at INR 1000 for 4.3 Crore warrants, amounting to INR 4300 Crore. What I know as an investor is that a company announces buy-backs when it has extra cash and it feels its share price is below its intrinsic value. A company announces allotment of warrants when it needs cash infusion and its share price is above its intrinsic value and equity dilution doesn't affect EPS a lot. When the promoters and directors feel that the company's share is undervalued at INR 1600 and overvalued at INR 1800 and again that the company's share is undervalued at INR 700 and overvalued at INR 1000, they simply are confused.

How are Markets moving? - Part 2

Extending Part 1 of this post, here is the comparison again after election results.

Standalone vs Consolidated

With the help of StatCounter, I have been able to find what people are looking for while investment. There was a search yesterday on Google by one investor which led to my blog and the search keyword was what the title of this post is. Many people want to know what is the difference between the two kinds of results published by the companies. Let me give you the definition:

Standalone Financial Results of a company includes only the revenue, expenditure and other items for the company.

When a company has some stake in another company, the other company is called subsidiary of the parent company.

Subsidiaries can be of many types:

1. Wholly owned subsidiary: The parent owns 100% shares of the subsidiary.
2. Majority owned subsidiary: The parent owns more than 50% shares of the subsidiary.
3. The rest is also divided in two types

• Company holding greater than or equal to 20% shares but less than 50% shares of a subsidiary.
• Company holding less than 20% shares of a subsidiary.

The GAAP says when a company publishes consolidated financial results, it should follow the following rules:

1. If a company holds more than 50% stake in a subsidiary company, the consolidated financial results of the company should add all the revenue, expenditure, profits and other items to its financial results in respective items but the profits; that does not belong to the company due to minority shareholders owning shares of subsidiary, should be shown as minority interest. Thus if a company owns 100% in a subsidiary company, minority interest is 0.
   
2. If a company holds more than 20% stake in a subsidiary company but less than 50%, the consolidated financial results of the company should add the proportionate revenue, expenditure, profits and other items to its financial results in respective items, i.e. If a company A owns 25% stake in company B, B's 25% revenue, 25% expenditure, 25% profits etc. should be added to the respective items of A's standalone results to get the consolidated results.
   
3. If a company holds less than 20% stake in a subsidiary company, the consolidated financial results of the company should not be any different from its standalone results.

Let's understand this by example. Look at L&T's Standalone results and Consolidated results for FY2008. L&T has many subsidiaries like L&T Infotech, L&T Finance and L&T has very different shareholding for each of its subsidiaries. When the L&T creates it's consolidated results, it follows the above three GAAP principles to add the revenue, expenditure, profits and other items to its standalone numbers to get the consolidated results.

Because of case 3, P/E of some company sometimes may not reflect the true picture of the company's valuations. There is one significant example of this in Indian stock market, HDFC holds 19.xx% in HDFC Bank, thus HDFC's consolidated results do not include the profits, revenue and other items from HDFC Bank. HDFC Bank is valued at around 50K Crore, 19.xx% of it is around 10K Crore. HDFC itself is valued at 60K Crore with a P/E of 26. But if you remove HDFC Bank's valuations from it, P/E comes down to 22. I am not sure if the market is adding HDFC Bank's valuations to HDFC.

We have got more victims

We have got more victims with respect to the article Indian Banks are in for a tough time - Part II. Jet Airways defaulted on its interest payments. As discussed in the previous post, Unitech had defaulted on its payment and investors in debt funds didn't see their returns reduce because of transfer of debt from debt funds to equity funds by SBI MF. Great way to reward equity and debt investors!!!!!!!!!!!! Kingfisher Airlines, previously known as Deccan, also defaulted and so did Arvind Mills. Alok Industries escaped default by diluting equity by more than 200%.

Something out of the box - Part 2

I wouldn't take any credits for posting Part 1 of this post. It was purely a technical call. We have got more than what was predicted as Nifty touched a high of 4500 and Sensex 14930, 19% more than 3800 and 12500 respectively. Now the second part of this post predicts to get at least 10500 on Sensex and 3150 on Nifty over the next 9 months, i.e. by February 2010. Wait and watch!!!!

Psychology of Buying

My experience of last two years in stock market suggests that it is easier for a value investor to buy a stock at 50 while it is going down and has corrected from say 100 then to buy a stock at 50 which has risen from 30. As a value investor I have shunned investment in Indian stock markets the day Sensex moved past 11000. I thought that it has risen from 8000 to 11000 in just two months so most of the value it was offering is gone now. The fact is that I was investing at these vary levels in October 2008 when market had corrected from around 21000 levels in January 2008. The emotions are difficult to overcome and psychology of humans is hard to understand.

Indian Executives Dumping Stocks

Following the footsteps of their US counterparts, Indian directors too have started dumping the stocks of their companies, two of them belong to ICICI Bank and Polaris. You and I have less information about the company's future than the CFO of a company for sure, unless the CFO is going to leave. There might be more such incidents but I will leave it to you to find out.

NPA of banks rising alarmingly

I had written about ICICI bank NPAs rising alarmingly earlier. It seems the same applies to other banks too. SBI reported 45% increase in net profit for quarter ended March 2009 but the Net NPA has risen from INR 7424.34 Crore in March 2008 to INR 9552.02 Crore in March 2009. In percentage terms it has declined from 1.78% to 1.76%, this is despite RBI providing respite of restructuring loans. ICICI Bank Net NPAs have also risen from INR 3490.55 Crore in March 2008 to INR 4553.94 Crore in March 2009. In percentage terms it has risen from 1.55% to 2.09%. Some prudent banks have considered restructured loans as NPAs as in case of HDFC Bank, which saw Net NPA rising from INR 298.52 Crore in March 2008 to
INR 627.62 Crore in March 2009. If you look at some of the figures related to restructured loans at BOI-INR 4800 Crore, Central Bank-INR 1803 Crore, Karnataka Bank-INR 350 Crore, IOB-INR 5000 Crore and Others-INR 5000 Crore, it is pretty big. CRISIL has already come out with a report recently that Gross NPAs are going to go up three times from INR 56400 Crore to more than 1.9 lakh Crore. The total net profit of top 18 banks in March 2009 comes out to be about INR 35000 Crore. As per ARCIL, the recovery rate or yield on NPAs is generally 15% but that too average. In bad times it might be less. So 85% of INR 1.9 lakh Crore comes to about INR 1.6 lakh Crore, which is more than 5 years of profits of all the banks. God helps RBI in 2010-2011.

Why hide losses?

The company I am talking about is Selan Exploration. The company didn't separately publish its fourth quarter (March 2009) results but gave out only the full year results here. The company officials might feel they can fool investors but it doesn't take much time to find out that the fourth quarter total income is INR 7.6 Crore and the net loss is INR 3.38 Crore. CNBC-TV18 did find it out and took an interview of the chairman here. It seems that India has started following the US lately. In the US, CXOs are just looking at their company's stock price all the time. Similar behaviour was observed recently with ICICI Bank in Sept - Oct 2008 when Joint MD Chanda Kochhar said that not just ICICI bank depositors safe but the share is also a good long term investment. Unfortunately I have not been able to find that link.

How are Markets moving?

Here is a comparison of Nifty Movement between August 2007 - January 2008 and March 2009 - May 2009. Do you see a match?

Zydus Wellness - Is there value? - Part II

As mentioned in my previous post on this company, the december quarter results were seasonal in nature. There is also another possibility that the accountants included the revenue/profit of demerged personal care business of Zydus Cadila of the first two quarters of FY 2009 in the third quarter results of Carnation Nutra to make the nine months result give the complete picture. The full year results show EPS of INR 6 making the stock priced at more than 10 times earnings at INR 60.