How low can the market go in FY13?

Currently the market is trading at about 17x foward,  above its 20 year median level. It clearly needs to come down to the median level, there is nothing happening to suggest the market should trade above long term median range.

The bunched up negatives tends to suggest it should go below the median. How low can the markets go? In the worst case scenario, Sensex tends to down to about 11x forward. Things arent that bad yet.

The local situation has a few positives, the main one being that interest rates which have peaked out. The RBI will not raise them anymore, but may not be able to cut much either. A 50-100 bp drop by Mar’13 is not likely to kickstart demand, either consumer or industrial.

Negatives are several – fiscal deficit will slip further, tax hikes and petro price hikes will spur inflation, the UPA govt has lost credibility..The opposition is doing no better, so we are likely to have a hung parliament in the next elections, so more drift and decay likely.

There is a real danger that both FDI and FII flows may ignore India over the next 2-3 years, or atleast the remaining part of 2012.

Markets to head down now..

Towards the end of Dec’11, we wrote that there was more upside than downside in the markets (See post ‘More upside than downside in Indian equities’)

The markets did rally up after that. The Sensex rose to around 18400 levels by mid Feb, rising about 19% in 7 weeks.

But, given the turn of events in the last 3-5 weeks, time to do a u-turn. Looks like the Sensex should trade with a median value of 15-15.5K or about 14x forward. At current levels of around 17K, the market is at about 17x forward, which is not sustainable, too many negative ahead.

Inflation remains stubborn, the need to raise petro prices will put furhter pressure on inflation. The UPA govt seems to have no ability to do anything constructive, and worse, India seems to be regressinng back to the pre’90s license-permit raj. Retrospective action against MNCs (2G licences, Vodaphone case) sends negative signals. Fiscal deficit is out of control and will get worse. This will put pressure on rupee and interest rates. In other words, very little going for businesss,

There is atleast a 10-12% downside ahead.

Market Matrix range for 2012/FY13

NBCC IPO appears dirt cheap

Unless we are getting some math wrong, the NBCC IPO appears dirt cheap. At the upper end of the IPO price band, the valuation seems to be just about 8.5x 1HFY12 annualised eps. Similarly, EV/EBITDA is just 5.3x at the upper end.

The market cap at the upper end of the price band appears to be Rs 1272 crore. And NBCC is a zero debt company with Rs 1368 crore of cash on its books on Sep’11, as per IPO document. So what is this – the government is giving away the company for free?

On day 2, the IPO is already oversubscribed about 2x at the upper end of the price band. Wont be surprised this issue gets subscribed 50x!

Is the bull market back? And is Opto a shady stock..

In bull markets, some companies tend to make frequent announcements/press releases with the main objective of keeping excitement alive in the stock.

Opto Circuit is very good at this game. Check today’s announcement by Opto –

Medical device maker Opto Circuits (India) has signed a contract with Criticare Systems Inc to supply patient monitors to hospitals in Russia’s Tyumen Oblast province.

This came in Hindu Businessline. And moneycontrol gives this a distinct spin..

Opto Circuits US arm has got order to supply monitors to Russian hospitals, reports CNBC-TV18. Opto Circuits India touched an intraday high of Rs 224.80 and an intraday low of Rs 217.50. At 11:28 hrs the share was quoting at Rs 223.65, up Rs 7.90, or 3.66%.

So is the bull market back? I mean, what the f is the Tyumen Oblast province in Russia? Why shud companies be releasing silly announcements like this…

Shady stock, this Opto Circuit.

Note this in the Hindy story – Opto Circuits, however, did not disclose the value of the contract.

Of course it cant, most likely it is some two-bit contract which means nothing much for the stock price if the value was revealed.

More upside than downside in Indian equities

Time to shed some of the pessimism now about Indian equities. One reason is simply the math. The Marketmatrix that we follow suggests there is less downside than upside to the market. As I wrote earlier, the downside to the 2011 forecast held very well thru the year, despite all pervasive negative news

Also, while i havn’t checked advance-decline for 2011 yet, I think this will be better in 2012. This is the most important thing for retail investors. If advance-decline is more than 50%, you will most likely make money.

This is how I think 2012 could pan out –

Likely Sensex Trading Range 2012

As this suggests, Sensex may not fall below 15k for any length of time. If sentiments improve, then the trading range may extend to 19K levels.

Of course, ambient sentiment and data would influence the valuation, which we continue to assume will not fall below 14x forward. Factors in favour of this – inflation seems to have peaked, interest rates will head downward. If Congress does ok in the coming assembly elections, it will help.

Negatives – global macro scene, domestic fiscal deficit which could worsen due to things like food security bill etc.

FY12 9m Sensex trading history – downside held so far

In Feb’11, we had posted the following trading range for the Sensex for FY12 (see post ‘  Market View: Sensex range 15.5K to 18K for FY12‘)

SensexMatrix for FY12

For the first 9 months ending today, the Sensex has held very well above the lower limit of this range.

Sensex trading performance over Apr-Dec'11

Counting today’s close at around 15454, and 184 sessions including Friday, the Sensex has closed below the lower end of the range only 4 times. On the other hand, the Sensex breached the higher end of the forecasted range fully 92 times, or about half the time. This breach was highly front ended. Between 1 April and 4 August, or for about 87 straight trading sessions, the Sensex closed above the higher end. In the 97 trading sessions since then, it has breached this range only 5 times.

So what to make of it? In Feb’11 we were more bearish than most market parcipants. Other forecasts were still in the 18K to 21K range for FY12. While they were right in the initial period, the market came down to our range finally.

Currently, market expectations are in the 13K to 16K range for 2012. In other words, market participants are more bearish than our current range.

Bond Yield comparision still unfavourable for equities

I had written about Earnings Yield and Bond Yield comparision last in March (Earnings yield chart shows markets should go down).

Here is a new chart on the same from an Angel report, this has longer data.

Earnings Yield versus Bond Yield

What this chart shows is not good for the market. While earnings yield has edged closer to bond yields as markets fall, bond yields are still higher, which means markets will remain bearish. As the chart shows, best returns are made when bond yield falls below earnings yield. Lesson for equity investors – hold your horses, a better time to buy will come

The difficult art of Sensex earnings projections

This chart illustrates how Sensex earnings projections of any duration more than 6 months are meaningless. This broking firm has predicted earnings growth of less than 10% for FY11. The first half is actually only around 6-7% growth. But then FY13 growth shown is 18%, which is pretty much the trend rate.You really dont need to do elaborate models for 30 companies, add them up to come up with FY13 earnings forecasts at this stage. 18-20% is simply the long term trend.

FY13 number will remain aimless till Q2 results are out. Even at Q1 they are often close to trend rate of 18-20%.

Simply goes to show earnings growth projections themselves are quite meaningless for durations beyond 6 months

Dismal H1 results

The result season got over a while ago, this is a delayed post. The chart shows how poor H1 results have been. It is likely listed companies will see earnings decline in FY12. This does happen too often in India. The last time this may have happened was in FY02, when markets used to trade at 11-13x forward.

Could we see a repeat of that? So far, markets are holding at around 17x FY12 expected EPS. But this could well be the upper limit of trading values for the next 6 months. Right now, no one has a clue on FY13 numbers. Typically, at this time, people will budget a 15-20% growth in earnings in FY13.

So it really depends which way expectations go by around April’12. If by that time market things FY13 will also see degrowth, or less than 10% earnings growth, then we could see valuations correcting to lower end of the Sensex trading range.

The curious case of Geodesic

Goedesic declared its usual bumper results today. Net profit for FY11 is, hold your breath, Rs 344 crore. This is up 54% from Rs 223 crore declared for FY10. Revenues are up 37% to Rs 874 crore.

The market tho gives this company a M Cap of Rs 728 crore, or a P/E pf 2.1x. There is debt of Rs 590 crore, or the EV is around Rs 1300 crore. The EV/EBITDA is just 3x.

So is Geodesic a roaring buy? The market clearly does not think so. And why? Of course, operators always know the inside stuff.

Even for a layman it is not hard to spot. If a company does not pay tax, and does not pay dividend, you need not believe its financials. In the last 5 years, Geodesic has paid tax of Rs 35 crore or so. That is on PBT of around Rs 1100 crore. It has paid dividend of it seems around Rs 90-100 crore. All this is not much in comparision to its reported profits.

So how long before the Satyam (truth) comes out?