Already valuation of consumables getting discussed. Thank you @sujay85
Disruption, Disruption Disruption!
Nothing can be taken for granted these days. Paying a high price in the name of âassuredâ future growth, is simply tricky.
Some thoughts on PE:
First basket,
A lot has been discussed since 2018 about financials being overweight in Nifty. Though weightage has increased to 35% and is probably highest ever.
But if we look at Berkshire Hathway portfolio, banks form 40% of portfolio.
I assume that they think that high quality financials are good investments in a growing economy.
And this is borne by fact that typical credit growth is 1.5x GDP growth and high quality franchises will do even slightly better. Now if they are able to manage credit costs well they are likely to beat index growth. So they will command premium.
Have not seen much disruption to HDFC twins, Kotak etc so far. Payment banks did not take off.
Second basket is FMCG.
Again likely of Nestle has had dream run for last 3 decades despite being expensive to start with. Likes of HUL and ITC have done reasonably well.
No disruption for them for another two decades. Infact Unilever hit lifetime high this week on DAX.
So these will continue to command high PE.
Third basket is IT services. 20 PE seems to be baseline. They were bargain when trading at 15 PE and trading at huge discount to US/Europe counterparts a couple of years back. People who donât understand industry keep writing them off since 2000 for some reason or other in Y2K, tech meltdown, Visa issues, dollar will go to 20, low tech work, can not compete etc.
These are world class, reasonable growth, tech services companies providing natural hedge against rupee depreciation.
Fourth, Reliance has transformed into a tech play from oil play and will be valued accordingly.
Last
Potential addition to Nifty, Dabur, Marico, Biocon etc. Will trade high PE of 30+ given nature of biz and future runway
And
Low PE commodity companies keep getting kicked out.
So, given all this, how do we get a low PE Nifty unless one is banking on once a century event of financial meltdown like 2008. Statistically it may not happen in our lifetime.
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Indeed, in a growing economy financials are a good bet.
HDFCBank and Kotak Bank are super stalwarts. Their businesses are epitome of stability. Surely, nothing local can bring their stock price down, it will have to be global event.
20PE is a normal going rate for top banks, current 27 PE is expensive. If HDFC-Bank reaches 20PE in near term then the share price becomes 1600. I am not counting on any major disruptions to our two banks. Having said that, our economy is much smaller than the American economy, and only a mid-sized global event is enough to normalize their valuations. The idea of deep discounts does not apply here.
I cannot get myself to justify buying these at 27PE, moreso because we are looking at an economic lull, which appears to be far from done. Underwear Index, Lipstick Index, Auto Index are pointing in the same direction. Only waiting for the NSE Index to get in-line with them.
FMCG do not have significant weightage in Nifty-50 yet, less than 2%.
IT too does not have too much room on the down-side, just couple of notches like you mentioned.
In conclusion, the entire focus is now on the Banks, Finance and Finance-Housing as it constitutes 40% of the Index. The economic status is not a good one, the world over. Therefore, there is a good chance that we might land an awesome bargain in the near term.
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IMHO, it is better to look at at P/B ratio rather than P/E when valuing banks, mainly because raw materiel for Banks is Money, which is a commodity. P/B gives a better idea on the valuation. HDFC bank historically been valued at 3 to 3.5 P/B .
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From Discover on Google https://scroll.in/video/935964/hide-in-a-basement-take-a-bath-watch-tips-on-surviving-nuclear-attacks-as-suggested-by-zee-news
Not a good time for any of the two or three countries to be war-mongering.
China is getting it full on from Trump.
Indiaâs GDP is beat.
Pak economy is doing far worse. But, if it were left to itâs army they wouldnât let another week go by.
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Reliance Inds contribute 10% to the Nifty Weightage. Therefore, changes in its stock price will affect Nifty PE.
For the first time in a very long time TTM EPS of Reliance is de-growing, coupled with a high level of debt (0.80 DE), for a company of its size (6 Lakh Crores in Sales). This is like to cause a de-rating for the stock.
My expectation is that, Reliance Indâs average PE is 15 to 17. That puts the price around Rs.850, which is a thirty percent correction. This contributes to 3% of a drag to Nifty-Index.
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Major stock market valuations around the world have risen in recent years as we entered a world of low interest rates
So in India further downturn looks unlikely 
I am not questioning his wisdom, but did he not say this many times in the past? Just take these big investors with a pinch of salt. They know their statements can move markets in the short term and they may have an axe to grind.
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Surely, one cannot expect RJ to speak openly about what his team of expensive accountants have decided, after weeks of constant research and networking. He is surely not going to reveal his war-room wisdom, for public benefit.
In fact, these people every so often tip the sentiment just a tad-bit, like a catalyst, and when there is a surge of buying, they offload. How else are they going to get buyers?
It makes sense to rely more on the data in the Annual Report, and historical numbers.
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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 arenât 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.
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.
Do you have a source that this is used by Buffett?
More likely is that the GDP figures are false. GDP figures are out of sync with most other data, so I donât really believe the GDP figures.
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. Whatâs 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.
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For Mcap to GDP, we should not use Buffet indicator. India should have lower MCap to GDP compared to US.
- IT hardly is related to anything in India.
2 95% of retail in not listed. - 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.
WRT to Us Dollar IndexâŚan inverse co-relation with S&P has always triggered recessionary sentimentsâŚso if S&P is rising and Dollar Index is coolingâŚbad news for TRUMP.
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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 didnât know buybacks were taxed as well.
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A quote today from Basant Maheshwari âFor a company paying 35% tax earlier now 25.17% the PAT will jump by 15.12% . As this isnât a guidance but an increased cash flow till eternity the P/E even if it expands by the same âif not moreâ should lead to a stock price move of (1.1512 x 1.1512)-1=32.52%. Lot more to come?â
Or in otherway we can say that valuation got better by 35% even if we donât go up.
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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.