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

[jamit05]

Yes. This is an era of liquidity. Ever since 2009 when the US FED started the Quantitative Easing programs, the world is flush with dollars. Due to which, inspite of so much pessimism, Nifty is finding support after just 10% correction. Now, even the governments have admitted to a recession, but aren’t sure whom to blame it on.

Yes. The patterns have changed. Market may not jack-knife its way to normalcy (Or it may, who knows; we can only speculate). Liquidity will provide cushion. Yet, IMO, no time is a good time to put your money only on basis of expectation and promises of future growth.

[jamit05]

Hello @777

If I sound like I am trying to negate what you say, then allow me to emphasize, that is not the case. I read your views, especially, because they are different from mine. It is beneficial to know the other side. Thanks.

Could you please provide some content regarding Mcap to GDP indicator. But, speaking just off the bat, if the indicator had to increase then GDP has to fall, which, I believe, is underway. Secondly, the if the PE ratio could be outdated, or the thing of the past because now the markets are liquidity driven, then the same should apply to the MCAP/GDP indicator? Just speaking my mind here.

Besides just Nifty PE, I track the PE of individual good stocks. I find them reverting to their historic means as and when there are headwinds. One of my most favourite occurrences is when a darling of the market, a high PE stock, fails to meet the lofty expectation, and is brutally beaten on its way down. The sight is just magnificent. (Pardon me for being sadistic. I understand that a lot of people might be losing their shirts over it.)

Currently, Energy PSU, Auto and auto related, Pharma sectors are facing such headwinds. These sectors has some really (really) good stocks, which will not let you down.

[VijayShetty]

Mcap to GDP used by buffet

Do you have a source that this is used by Buffett?

which is currently at 67% for india

More likely is that the GDP figures are false. GDP figures are out of sync with most other data, so I don’t really believe the GDP figures.

[jamit05]

Now Jio is #1 and debt on balance sheet has reduced. In addition to the RIL is turning around retail business and has good business strategy on how they want to grow retail using jio. All this commands higher multiple with more visibility on future business side.

Bharti Airtel is posting negative EPS. Such is the business of Telecom. EPS has fallen from a high of 13.96 in 2016 to a low of 0.96 in 2019, That is disturbing. And now the TTM EPS is a negative 5.45.

For the company, the borrowings also has increased from 100,646 in 2016 to 125,428 in 2019. What’s more worrying is the interest coverage ratio has shriveled to 0.45

Bharti Airtel was an established player, and this the state of affairs. I am having a hard time accepting that Reliance JIO will be much different. As a retail investor I do not like to invest in businesses that need large capital, where they balanced sheet gets precariously leveraged. Nonetheless, each is entitled to his own view.

[nav_1996]

For Mcap to GDP, we should not use Buffet indicator. India should have lower MCap to GDP compared to US.

1. IT hardly is related to anything in India.
   2 95% of retail in not listed.
2. Most of Consumer electronics including mobile devices in not in listed space.

We should subtract about 20 lakh crore(10 for IT and 10 for retail and electronics) from mCap to do a Mcap/GDP ratio.

[Darkwanderer79]

On the contrary when ever the Fed cut rates in US a recession has followed.

[Darkwanderer79]

WRT to Us Dollar Index…an inverse co-relation with S&P has always triggered recessionary sentiments…so if S&P is rising and Dollar Index is cooling…bad news for TRUMP.

[jamit05]

Lower tax, will lead to higher EPS, will bring about the much needed reduction in Nifty PE. Now, Nifty reducing to 9000 will be much more meaningful.

Current Nifty PE is 27.72, as per the NSE website.
That puts the EPS to 407. Now, with setting 8% tax benefit across the board, one can expect that even if in the next few quarters the results are dull, the EPS of 407 will remain unchanged for most part.

Wipro and Infy got a neat benefit of Buyback tax relief. I didn’t know buybacks were taxed as well.

[777]

A quote today from Basant Maheshwari “For a company paying 35% tax earlier now 25.17% the PAT will jump by 15.12% . As this isn’t a guidance but an increased cash flow till eternity the P/E even if it expands by the same ‘if not more’ should lead to a stock price move of (1.1512 x 1.1512)-1=32.52%. Lot more to come?”

Or in otherway we can say that valuation got better by 35% even if we don’t go up.

[Divyanshu_Bagga]

In general, no. You cannot make this claim for any company; they will not be able to protect the increased profitability forever. But if the business has a very strong moat, then perhaps yes, that is one possible way to justify current move.

Divyanshu's Portfolio

Tax cuts will not impact all businesses equally. Yes, it will raise profit margins, but that is also true of your competition, and if the company does not have competitive advantages, competition will eventually lead to passing the benefits to customers. One can argue that more money in the hands of consumers will boost demand, but that is only if the government also takes measures to control expenses, and hence, fiscal deficit. Otherwise we are just replacing corporate tax with inflation tax a…

[Chandragupta]

Not so easy. Profits will be 15% higher every year than what they would be with old tax rates. But growth rate will not be higher, it will be the same. Therefore, there is no reason for P/E expansion, assuming we are not considering second order effects. Thus, valuations get better by 15% only, not 35%.

However, he has clarified further this works for BFSI, which I agree. Because, here Retained Earnings itself is the Raw Material which can be leveraged and so, growth rate will be automatically higher. So P/E expansion can also be considered.

[777]

Profits will be 15% higher every year than what they would be with old tax rates. But growth rate will not be higher, it will be the same. Therefore, there is no reason for P/E expansion, assuming we are not considering second order effects. Thus, valuations get better by 15% only, not 35%.

Fully Agree on this. However, large part of the slowdown was a result of liquidity problem arising as a result of huge NPA’s. If this benefits BSFI more, that means BFSI will take less time to repair their balance sheet (Which is almost complete with provisioning already around 75-80% for most PSU banks). This inturn should increase credit offtake and help other sectors.

[Divyanshu_Bagga]

Why only BFSI? Consider Dmart for example. It retains all the profits and reinvests it into business expansion. Now it will have 15% more profits, and therefore higher reinvestments, which should lead to higher growth trajectory than before.

[eyesice]

Can you please explain how PAT jumps by 15.12 % when tax is slashed by 10%. sorry newbie question!

[Uservijay]

Can you please explain how PAT jumps by 15.12 % when tax is slashed by 10%. sorry newbie question

It is very simple. Assume pbt of 100 rupees. So at 35% tax, Pat is 65 rupees. If tax rate is 25%, Pat becomes 75. So company gets additional Rs. 10. 10/65 is 15%.

[homemaker]

Does that mean on approximate basis, sensex which was at 36000 will move to 41000 and then this whole tax cut gets completely priced in. Nothing much has changed in Macros, so further upside is limited. Is this a correct line of thought?

[Divyanshu_Bagga]

Another point from the same thread: the valuation may have moved even higher, like ~44% if the ROE is 25%, as the company is able to deploy the retained profit at even higher rates.

Basant Maheshwari (BMTheEquityDesk)

[Uservijay]

Nothing much has changed in Macros, so further upside is limited. Is this a correct line of thought

The tax cut is not for 1 year. It could be for more than a year and some even expect it to be perpetual. So you may have to calculate that based on the tenure of this savings. Second order and third order events may add up over the longer term if this is not reversed too soon.

[Divyanshu_Bagga]

No it does not. The tax cut will lead to an immediate gain in earnings by 10-15%, depending upon the earlier tax rate. Now if you assume earlier P/E ratio is maintained, therefore price should go up by 15% (that takes sensex from 36000 to 41000), that is a simple way to explain the rally.

Alas valuation is not such a simple matter. Valuation of the stock reflects sum of all future discounted cash flows. It won’t rise by 15% just because the current year cash flow has increased by 15%. That increased in profitability also holds for the competition, and gives the incentive to the sector to expand supply. If the business does not have a strong moat, that 15% gains will eventually be squandered to consumers, and the cash flow will return to earlier profitability levels. So in this case the valuation will rise by less than 15%, depending upon how much demand is stimulated.

On the other hand, if the business does have a strong moat, it may be able to protect a significant fraction of 15% gain in future as well. Furthermore, if the said business retains all the profits and reinvests it at high rates, then the gain in future cash flows can be even higher than 15%.

So you need to be business specific, analyse how much of the increased profitability will be retained, what fraction will be reinvested and what will be future rate of returns for this additional investments.

[jamit05]

What about good but cyclical businesses that are reeling under pressure. Their profitability is low or even negative, interest coverage ratio is getting worse by the quarter. What positive effect will this policy have for them?

Auto and ancillaries, Tyres, Pharma, Reality, Energy, Consumer stocks, to name a few sectors that are facing a down cycle.