Do the VP seniors have any opinion on the current market valuations and breaking 52 week highs. Selected stocks have almost doubled since April without the businesses doing that well. It seems the same globally where US and other markets like Japan, HK and others are also at all time highs.
Most of the drivers are technology stocks that are all time highs. Just like 2001, is this a bubble in the making?
True tech has galloped like anything last few monthsā¦but should we compare this to 2001? Infy, Tcs etc were trading at 100 plus PE back then and few months back they were 15 pe stocksā¦now they after rerating are anywhere between 30 to 35 PE and high growth midcap IT at around 35 to 40 PEā¦point is market thinks that decent sustainable growth is possible in IT for next few years and hence rerated them accordinglyā¦infact I see this rerating as anticipation of sustainable decent growth for next decadeā¦
15 PE for a stable sustainable cash rich top class management with decent growth visibility was clearly undervalued in hindsight.
Point is, is the anticipated stable growth coming?
important to note vs 2001
a) interest rates were much higher and hence was the discounting factor
b) FED put + Govts controlling central banks: The relevance of FED put has come in the last decade post Lehman bankruptcy, no US president wants to see a big institution bankruptcy causing spiralling effects unless heās in the second term and could not care lesser for re-election (George Bush in 2008). So the fact the FED will always bail you out by buying bonds or even stocks, puts further pressure on discount factor
c) in 2001, there was no smartphone, you could not reach consumers so easily at scale, so most consumer businessā never took off
d) investing has been democratised vs 2001 - comment from a pakistani uber driver in london - " Sir, look at my portfolio, its got TESLA, its the future and i will never sell it" - ā¦point is everyone from every class is investing and these are not necessarily levered players. direct retail participation at scale is keeping the floorā¦
e) Lot of tech stocks are followed as a religion and in religion you dont judge Gods (founders) performance. Tesla/Elon Musk great example - and thats happening because investing has been democratised/ 0 fees etc
I think Covid acted as a CMO (Chief Marketing Officer) for all tech companies. Suddenly companies, which were not considering technology in their field, were forced to āwork from homeā/remote working. This opened new avenues of cost reductions for many companies, which they have never thought about it earlier. So market size of the opportunity for all IT companies grew multifold in short span of time.
This quarterās results and commentary would be interesting to watch. I guess happy days are here again for IT companies as most of them would be expected to grow double digit for next 2-3 years (TCS already confirmed that). With demand comes, pricing power. So I expect margin expansion as well as topline growth in IT sector. This is partly priced in the current market rally but I feel it has some legs to goā¦
Some more views about IT stocks
3 observations on this:
Some of the āSo-calledā compounders who have worse cashflows that IT companies are trading at 100PE 150PEā¦ So whatās wrong with 35PE of IT companies if they are growing at the same rate as those compounders with better cashflows, lesser capex, better ROE and exceptional global brand/leadership.
Generally, bubbles are by nature so that most of the people canāt see anything wrong or downside. I think bigger bubble is in FMCG, Paints, banks and similar sectors rather than IT. In 2001 IT bubble peak, most of the IT companies with unproven model and far behind in value chain were are 100+PE. Bubbles generally come with storification and canāt be justified with any financial metrics.
Everyone remembers the 100PE of Infy in that bubble. However, it wasnāt Infy valuation that was problem of bubble. 1000s of companies with no cashflows no earnings were running up. The valuation criteria from cashflows/earnings shifted towards visits per day, average time spent on site etc etc.
Hi Folks
Just my thought on understanding, I think we are not in bubble zone and valuing Business with PE is going irrelevant in recent time.
As a economy we are marching towards 5 trillion (already we around now 2.5Trillion ),Young demography plus Apple Netflix Microsoft is trillion dollar company then company whose outsourced work is completely done majority by Indian IT company .Due to cost & cheap labour most of the work will be outsourced and will benefit Indian IT tech giant. Example Microsoft,Apple are major revenue driving account in few Top 5 IT companies.
Is like win -win situation. When Apple,Google,amazon,Netflix,Visa,Microsoft are getting rerated and going trillion mark ļ then this should translate more PE valuation will be given to Indian Tech area. I believe this is just trailer and main picture bhaki yeh 
Example :TCS is 11 lakh Market cap will sure touch 1 trillion (60 Lakh market cap ) -> this will happen only when USA or Tech products Gaint get moved to 5 trillion mark.
To World we already proved that IT area and Top IT companies proved their credibility. We cant deny that Big US giant company are gained Market share without IT tech workers.
P.S Apple,Google,amazon,Netflix,Visa,Microsoft whose PE getting re-rated by consider global as market place and we Indian IT company also taking pie in that simple
PE should not be used for valuing consumer companies at present. The denominator of PE is EPS comprising of Q1 and Q2 EPS of lockdown when those companies gave negligible profits. This makes the PE optically high.
The possibility of companies giving a YoY profit higher is more if no further lockdown occur.
If the markets fall, many people would be eager to enter markets as they have lost a chance to invest during march lows giving support to price.
Better to prepare with a list of companies to invest and wait for their PE to fall during results time (EPS rise) or during correction (price fall).
You mentioned correctly bubbles are when multiple companies with negligible cash flow trade at astronomical valuations but the FMCG and Paint you talk about have supporting fundamentals. They may be over valued at times but why you see a bubble? 100 PE of such companies will soon in coming FY transform to sub 50 once QoQ growth is back to pre covid levels. IT may or may not be in bubble (although some tech driven stocks other than mainstream IT are in doubtful stage) but certainly FMCG and Paints have supporting fundamentals for leading top class valuation that market can give to any sector at present. Views invited
Yup they might not be in bubble but definitely are very very overvaluedā¦ I consider them bubble because no one talks about their valuation and earning power. Only story is that they have compounded for many years and hence should continue compounding. Most of them are at 80-100 PE even if you annualize last Qs earning. Plus, many of these companies (like paint) actually enjoyed very low raw material prices during this period. Lastly, these companies might never see a bubble burst as it is but they might see huge time correction with multi-year 0 returns. HUL had 0 returns from 1999 to 2010ā¦
Bubble will be known only after the burst. To explain, there is a difference between the two - are we setting up a bubble or have we set up a bubble. Leave it to financial community to decide.
Consider two trains - fundamental and valuation - headed for same destination (traditionally saturation point for economy/industry). Here destination can also be a moving goal post. Therefore there are 3 elements in dynamic state. When valuation move too fast ahead of fundamentals, an overvaluation situation surfaces. If fundamentals catch up valuations, then a bubble and eventually a burst gets avoided. But if fundamentals donāt catch up, then a crash is inevitable.
Though, it looks simple in theory but not easy to demystify in reality. Everything is fluidic in financial markets. Distance and speed difference between both the trains is something that decides a bubble situation. Irrational market moves can last longer than expected. Therefore, keep an eye on fundamentals or earnings return to understand the situation better. All the best.
