Tuesday, May 17, 2011

Sensex EPS drops after SBI results

I had tried to give an early indication of Sensex EPS for the year 2011 in an earlier post. I had assumed that since around 46% of the companies; that are part of the Sensex; had announced results that increased EPS by 12.6% YoY, there will be some more gains in EPS when all the companies finish reporting their results. Today SBI announced their horrible results for the year ended March 2011 and the Sensex EPS; which was prevailing at somewhere around 933 (18345.03/19.66) yesterday; dropped to 924 (18137.35/19.63) today. Nifty still does not seem to be reflecting it. This result was before the interest rate hikes of 25 bps of January 2011 and 50 bps of May 2011 since the bad loans take at least 90 days/three months to come into banks' books. God help those analysts predicting an EPS of 1200 or more for FY12 (1100 for FY11 by Rakesh J, 1070 for FY11 by Motilal Oswal, 1250 for FY12 by Raamdeo, 1345 by UBS and 1100 for FY11 and 1250 for FY12 by Credit Suisse). Those who are finding PSU banks cheap on P/B or P/E basis need to rethink about the correctness of the results being published by UBI, Bank of Baroda, PNB, Canara Bank, IOB, Indian Bank, Allahabad Bank, Central Bank of India and Andhra Bank. I had already written about a coming banking crisis in India in September 2010 and I still stick to it.
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Wednesday, May 11, 2011

Is this the end of MSFT?

This is the first time I am posting on a company not listed in India. I am talking about Microsoft. This post is inspired by Microsoft's buyout of Skype for $8.5 billions. Many of the big companies that are favourite of speculators get to a point where their dominance is threatened by creative destruction that is the core of capitalism. Microsoft has dominated tech industry for more than thirty years now. But over the last ten years, the growth of internet has just shaken the ground below this bellwether company. The company has meager presence in this area and is struggling to build products that make its presence felt on internet. The last time the company was this desperate was in 1997-98 which resulted into buyout of Hotmail at exorbitant price of $400 million in January 1998. I don't have the data for the revenue and profitability of this acquisition over the last fourteen years, but Microsoft share price did get a boost from $15 to $25 in a span of just eight months. The price today is still hovering at $25 and change after almost thirteen years.

Even the current internet division in Microsoft is bleeding with heavy losses with annualized loss number to the tune of $3B(billions with a B). The PC sales declined annualized 4% in the last quarter although the notebook sales increased and with the prevalence of virtual machines, operating system sales may not match one-to-one with hardware sales since many virtual machines can run on a single hardware server.

I am working in technology sector and not in Microsoft so my opinion may be biased. So take this with a pinch of salt. There is a famous call from Bill Gates on Kodak in 1991 when its share price was hovering around $30. When asked about Kodak, Bill Gates said, "Kodak is toast". The share price did go up to $90 and today going for $2 and change. Will he say the same thing for Microsoft today?
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Wednesday, May 4, 2011

How great companies outperform index over time?

Many a times so called analysts mark companies in FMCG and Pharma sectors as defensive. But if we look at the returns generated by these companies over long term, they are many a times much better than the returns generated from index. Today, I will describe two good companies from FMCG sector which have shown the same kind of characteristics over the last 10 years. The first is Nestle and the other one is Glaxosmithkline Consumer Healthcare. If you look at the returns generated by these companies over the last ten years, they can be summarized as shown in the following table:

* Average price
CompanyPrice 2002-03Price 2007Price 2011
Glaxo Consumer2505502200

You can see that during the bull market till 2007, both the companies underperfomed the Sensex by a hugh margin but after 3 more years, they are now outperforming the index. The Sensex generated returns of more than 40% compounded annually between 2002-03 and 2007 and many of the stocks like L&T, Reliance and BHEL went up by more than 25 to 50 times. The returns generated from both these stocks were of the order of 15-20% at best during those times. But the situation has changed over the last three years, all the stocks that generated great returns earlier are still trading 30-40% below their 2007 peak while these companies multiplied their returns and generated more than 40% returns compounded annually during the last three and a half years while the Sensex hasn't moved much. It is just in hindsight that somebody would have bought L&T and Reliance in 2003, sold them in 2007 and bought Nestle and Glaxo from that money. But buying good companies at great prices never turns out to be a bad deal.
Image: renjith krishnan / FreeDigitalPhotos.net
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Tuesday, May 3, 2011

Where will Sensex EPS be after FY11 results?

Following table shows the list of companies that have already announced their FY11 results along with their weightage in Sensex as of May 3, 2011.

ICICI Bank8.29
HDFC Bank5.61
Jindal Steel1.8

In total, 46.07% of the companies have announced their results so far and the Sensex value and P/E stands at 18534.69 and 19.87 respectively resulting into an EPS of 932.8. This compares with Sensex EPS of 828.5 on May 27, 2010. Thus, the Sensex EPS has increased by 12.6% over the last one year with 54% of the results still pending to be released, this at a time when the nominal economy is growing at a rate of 20%+ with 8% real GDP and 12% inflation. Not a pretty picture!!!

Image: jscreationzs / FreeDigitalPhotos.net
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