Sensex at 10,000: Time for a hard relook
by Mobis Philipose/ DNA Money
The markets are euphoric, all right. Despite repeated calls by top-notch brokerages like Morgan Stanley and Merrill Lynch that the Indian markets are expensive and that investors need to be underweight, the Sensex went right ahead and touched the elusive 10000-mark. That this happened through a single day gain of over 250 points also reflects the strength of the current rally in the Indian markets.
But there are some signs the markets left on Monday that all may not be hunk-dory.
First, although the Sensex breached the 10000-mark, it barely stayed beyond that level, declining quickly by almost half a per cent after touching it. Further, the near-month Nifty futures contract continues to have a negative cost-of-carry, or trades at a value that is lower than the spot value of the Nifty. This normally means that the future value of the underlying spot is expected to be lower in the future.
But leave alone the technical factors. The Sensex’s current price-earnings ratio (PE) of 18.5 times trailing earnings is certainly not cheap. Not to mention the fact that its PE multiple would actually be even higher if one were to adjust for the single-digit PEs Sensex heavyweights such as ONGC and SBI get. A look at the PEs of individual constituents of the Sensex, therefore, makes more sense. Pharma companies, Ranbaxy and Dr Reddy’s lead the pack with PEs as high as 63 times and 47 times estimated FY06 earnings, but that’s mainly because their earnings are expected to jump sharply from a low base next fiscal. Seven other companies including Wipro, HLL, Infosys and Bharti Tele-ventures trade at multiples of 30 times and above, but only one of them is expected to grow earnings next year at a rate that’s higher than its PE multiple. Normally, this is seen as a case of a stock being overvalued. Of the 30 stocks in the Sensex, only in the case of 9 stocks is earnings growth expected to be higher than the PE multiple, which means 70% of Sensex constituents are richly valued. Add to that macro factors such as increasing interest rates, rising inflation, high oil prices, and a deterioration in the current account, and it’s surprising that the markets have stayed afloat at current levels.
