Fairval

Notes on Indian equities, sectors and economy

How bad can it get?

Posted by fairval on March 8, 2008


While not too many brokers are saying it yet, there is a good chance that a bear market even in Indian equities is well and truly on. One might say that after almost a 5000 point, or around 25% correction, it already to late to say it.

But Sensex is at a shade under 16000 levels at the moment. And there is a good chance that it may rarely cross 16K levels in 2008.

This would happen if the P/E FIIs are willing to give the Indian market get revised downward. One reason the market rose 7x between 2003 and 2007, is that one year forward earnings multiple went from around 10-11x in 2003, to over 20x. At this point, Sensex’s FY09 P/E is around 16x. This is median range, neither optimistic nor pessimistic.

If the US economy goes into a recession, which it perhaps already has, then forward multiples will correct globally. So it is hard to see FY09 multiple for Indian markets expanding in the near term. So that leaves only one mode for market to be driven forward – strong earnings momentum. Earnings growth has shown signs of slow down in FY08. While brokers are still maintaining around 20%, expect some downward revisions.

So at this point, expect the Sensex to trade say between 14K-16K range, with a greater chance to head lower rather. Imagine the scenario —

– Further sharp writedowns for 1-2 months amongst global banks
– 1/2 mid size but significant global banking names go under (merge to survive)
– US economy officially in recession

If the above happens, expect Indian earnings momemtum to deflate, and market could well head to 12K range. Dont think it can head any lower

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