Friends,
Please note the following interesting facts about Nifty (since Jan 1999) without yourself going in to turning huge data yourself:
-Nifty PE was lowest at 10.86 on 09/05/03 and at the same time it had P/BV ratio of 2.02 and the Dividend Yield of 3.18%.
-Nifty had the highest PE of 28.29 on 08/01/08 while P/BV then stood at 6.55 (this is highest since Jan 1999) and D/Yld at 0.82 (this is lowest since Jan ‘99)
-Nifty had the lowest P/BV of 1.92 on 21/09/01 while its PE was 12.30 and D/Yld at 1.75 %.
-Nifty has 10.99 PE , 2.17 P/BV, and 2.18% D/Yld on 24/10/08 when it stood at 2582 points.
Now what may be observed in these figures, if the Nifty stays at present level:
-if the earnigs progress the PE will breach its lowest point and this is making new history.
-if the earnings remain the same, the P/BV ratio will keep improving making it move towards breaching the historical low of 1.92 P/BV, again adding new chapter to history.
-if the dividend pay-outs improve due to stoppage of expansion plans of companies in view of lower demand (ie recession), the D/Yld will improve to breach the historical high of 3.18%.
-if the companies post lower earnings the PE will go up but it has room for going up as the historical high has been 28.29 but the P/BV will still improve making it breach its lowest point 0f 1.92 which is again creating new historical point.
-if we consider the D/Yld in light of real rate of returns, it is positive while real rate of return on 10 year Govt paper would be negative (interest @ 7.5% minus rate of inflation of 11.04% ie minus 2.54%). This will be the post tax return against taxable interest returns.
-if the interest rates are reduced further, as is a possibility too, the difference in return shown above will be still more.
-if inflation remains the assets (other than cash and receivables minus debt) will keep improving besides the already existing revaluation surplus which does not reflect in figures of balance sheets.
-if the companies raise further capital at current prices, the P/BV ratio will still improve and the additional cash will either lower interest out go or will improve capacities. In both cases the PE will go further down.
-if the companies decide to use the cash generated for the buy back of shares the floating stock will diminish and will put upward pressure on prices.
-if these conditions continue the promoters can only increase their holding by open market purchase as the preferential allotment will not be liked due to high average price for last six months. This will also make the absorption of floating stock.
-if the low stock prices continue there may be attempts of hostile take over of weaker companies, even otherwise the weaker players may be bought out and their outstanding stocks extinguished.
-if the profitability gets diminished the cash-flows of the companies will have lower impact because the tax payment would first bear the impact.
-if the markets do not improve there would be lesser number of IPOs and demand pressure on investible rupee will be lower which will find way in to secondary market.
-the ratio of holding by the retail investor is at a low point compared to last year, those who booked profits in the bull run will come back to acquire shares.
-those who missed bus in the last many years bull run will try their hand out this time.
-all asset prices are going down so there will be less aversion to equity investing at a safe point.
-no capital gain tax on long term holding will invite new investors who would not like to book profits mid way ie before one year holding period.
There are many more ponderables but above are enough for today’s food for thought.
It is not surprising therefore that the analysts are being asked for the list of stocks worth buying. The lay investors do not understand much but at least understand that when 80% of value has already gone, the rest twenty percent may not go entirely. This is sort of thumb rule for them.
HariOm,
Krsna Khandelwal
BIRDINFO Stock Rx – A prescription for stock market
