Nifty PE crosses 24|A statistically informed entry-exit model!

[phreakv6]

Few posts above, I had posted the exports data and how things were improving. Well, I got around to getting imports data as well and doing some more analysis and this is how the story has evolved.

Seen along with imports, the chart looks like this.

Although exports are improving, the imports have hit an all-time high and the deficit (difference between exports and imports) that we as a country owe the world has risen drastically and is at a high last seen in FY13.

The Deficit has grown 43% in FY18 thanks to crude. You can also see how good FY15 and FY16 were for us when crude was low. Although our exports by value declined, our deficit was so much under control. This is the time we built great dollar reserves as well.

Also interesting is seeing how the ratio of Exports/Imports has evolved over the years - From high 80%s in early 2000s to the high 60%s now. All that development (or mis-management and corruption) is costing us dearly as we are not able to give back enough in terms of exports. Spending energy and building cars and spending fuel to run them is not really being productive although it contributes well to the GDP. The great Indian consumption story will hit a speed bump if its driven by dependence on crude.

Its also clear how this deficit figure is correlated with the fall in Rupee. In Aug '13 Rupee hit Rs.68 to the dollar and after that it has hit Rs.68 now - Both times our deficit crossed 10 lakh crores.

This is the chart for Crude imports.

Compared to FY13, the amount of crude we are importing has increased from 185m to 218m - Almost 20% higher, so any further increase in price of crude is going to hurt us very, very badly due to the multiplier effect.

I think the consumption story will hit a speed-bump if things go along this way. The way forward as long as crude stays high and with it the deficits and along with it a weak rupee, the play might be exports.

And with that, here is a list of some sectors which seem to be doing well in exports.

As I finish this post, I realise it might be a bit off-topic in this thread. The macro side of the story does correlate with valuations, as it affects the currency and interest rates, so I hope its not totally off-topic.

Note: The exports data doesn’t include service exports and is only for commodities.

[shreys]

Is it possible that our exports haven’t grown commensurately with our imports because we’re consuming more within the country?
Please excuse my ignorance.

[phreakv6]

Nearly 8 lakh crores of our imports are crude (5.63 lakh) and gold (2.17 lakh). We send this back as petroleum products and gold jewellery worth (2 lakh cr together). The same story repeats in importing iron ore and exporting steel, importing dye intermediates and exporting dyes and so on. We are only doing processing work i.e more effort you put in, you earn proportionately to that effort. Lather, rinse, repeat.

If India were a business, it would be a cyclical commodity business with a bad balance sheet. To be an asset-light business with a negative working capital, we need strong IP and patents based businesses where the whole world is our marketplace (like FANG, although they perhaps contribute more to Ireland and Cayman Islands than the US). Only these can grow our exports and revenues in a non-linear fashion.

So for all the energy spent burning imported crude, we are not creating productive assets that pay dividends - eg. roads and construction or reducing our dependance on crude - say through renewables and natural gas. There are good positive steps being taken but they will take years to pay dividends and our poor balance sheet and assets will haunt us until then.

[hnk_so]

SageOne - Samit Vartak

4 Sectors This Investment Sage is Meditating upon

Lets try to identify company in each four sector he is talking. He talked about four sectors without giving name of the company, now our job is to identify!. Lets take challenge ! )

My guess -
(1) Speciality Chemicals - Vinati org
(2) Building Materials - HIL
(3) Auto Ancillary - Amararaja batteries, BKT
(4) Data-driven Business - ??

[rajidse]

Data driven - Sterlite Opticals ???

[hnk_so]

I my guess Tejas Network???

[Yatharth]

All those who are concerned over high PE ratio, may have a look at this article of 6 years back.

We missed the gems like 3M, Eicher Motors, Jubilant Food, Aurobindo, Bajaj Finserv and many many more… just considering high PE as elimination criteria…

https://nseguide.com/stock-research/top-100-stocks-with-a-highest-pe-5/

[investr]

There is no right or wrong when it comes to selecting or ignoring the highly valued growth stocks.

It is all about the moat and moat can either be around the business or around the price.

Some people consider the moat around the business as more important and don’t mind paying high valuation.

While some other people want a moat around the price aka sufficient margin of safety on the price front.

I doubt reading an article can make people change the camp they are in.

[shreys]

I’m fairly certain there must be several cases where not paying an astronomical valuation saved/would have saved investors a lot of money. This is indeed a divisive issue with each side having its allegiants.

[gautham1]

Not a good list imo. Most of the companies in that list are high PE because of poor/thin TTM earnings. Its not that they were getting a high PE from the market.

[Rushil]

I am no expert here, but IMHO buying high PE stocks has paid off due to the low interest rates of the last 10 years in the West. Due to this people have piled into high quality businesses knowing that any hiccup in the business environment will lead to money printing or Quantitative Easing and hence businesses will do quite well. Also due to this the bond yields are super low and so equity is favoured. There is a lot of irrationality in real estate pricing also. In places like Hong Kong and certain luxury pockets in Canada home prices are defying all rationale of value.
Argument can be made that these factors affect India lesser than the west but I think they do affect the prices of equity. Just think back to February 2016. The kind of fear that put in the markets. 6 months of such fear and these 100 PE stocks will come back to reality.

Having said that I myself have bought these high PE super quality businesses. So to each his or her own.

[Gaurav_Agarwal]

Nifty standalone PE published by NSE on its website showed an unusual rise as a result EPS has come down.

[josephseby]

This may be due to the negetive results of PSU banks…

[Vijayk]

Why Nifty PE is so high but it continues to move higher?

1. Lot of earnings are in group companies of big companies. Hdfc Ltd, ICICI bank, SBI, Tata motors, many others … Have big subsidiaries with good earnings. However, nifty earnings are measured on standalone numbers.
2. Also, stocks like SBI have reported loss or near zero earnings.
   This pushes overall PE high artificially.
   Nothing to be scared off.
   Chill
   Nifty and good stocks are on course to new highs within a couple of months

[saumya2010]

S&P 500 PE Ratio
Mean: 15.70
Median: 14.69
Min: 5.31 (Dec 1917)
Max: 123.73 (May 2009)

Note: After 2008 crisis PE was highest

[nav_1996]

As discussed earlier, it was non-Nifty50 PE which needed to correct. Nifty50 PE was low compared to non-Nifty50 PE. That adjustment seems to happening pretty swiftly.

Not to say Nifty50 does not look stretched but explainable due to low profitability of last 5 years and earnings can catch up quickly as demonstrated by likes M&M and L&T

[deevee]

Hi @nav_1996

Although there has been a correction in the midcap index it is still at stratospheric levels if I could use this hyperbole from a pure index PE perspective. (continuing on the distribution curves I posted 6 odd months ago)
We have moved only 0.84% on the curve since Jan.

The Nifty50 is worse in some sense that the PE fell in the interim since January and overall it has only fallen again only 0.86%. You can see this in the next chart also.

Also if we look at the heat map. The current period seems to be an extended zone of lofty valuations.

So personally for me I hold the same stance as I held then. Though I have used this correction to nibble at some stuff. Waiting while sitting on cash is painful but I think I still believe in reversion to mean.

Lets see how things pan out. All the best to everyone.

Regards
Deepak

[nav_1996]

I think we can not look at PE alone. Kenneth thinks that in 2 years profits of manufacturing and related services will double as operating leverage kicks in (with 10% capacity utilization).

That makes forward PE look cheap for core sectors.

[nav_1996]

Yes my last year investments have been Infy, ITC M&M an TAMO. And things have not been bad luckily with these or other large caps.

Having said that I do look for quality expert advise to hone my skills. And above picks has been influenced by people whom I track and pick up clues. But yes, I do my own filtering.

Having said that Kenneth has strong argument, if you listen to it with open mind. Recently, he influenced my decisions to not do any further investments in BFSI and look at manufacturing and rural plays. M&M and TAMO to some extent are influenced by him.

[Gaurav_Agarwal]

Nifty website FII/DII sale/purchase numbers on 4/Jun/18 show a large purchase of about 2300 crores by FII’s.

I tried to look for more information on this purchase but could not find any.
Anyone in know of more info about this sudden one-off large cash market purchase by FII, please share.

Thanks