Stocks at 3/4 year lows

Ever wondered what it would have been like to buy stocks at rock-bottom prices before the recently ended bull run gained pace?

You needn’t travel back in time for the experience. With stock prices falling steeply, buying into the Nifty basket today would be tantamount to buying it at October 2005 levels!

The 47-per cent fall in the Nifty from January has taken the absolute level of the bellwether index back to its August 2006 value of 3,200.

But the price-earnings (PE) multiple for the Nifty, a measure of what the market is willing to pay per rupee of earnings, is back to levels prevailing a good three years ago.

The Nifty’s current PE of about 14 times (trailing earnings) was last seen in October 2005. If blue-chip names that figure in the bellwether index have seen their PEs crumble, mid-cap stocks have simply collapsed.

At a PE of 8.5 times trailing earnings, the CNX Midcap index now trades at a valuation not seen since June 2003. When the markets peaked in January this year, the Nifty was valued at a lofty 28 times and the Midcap index at 23 times.

The sharp fall in the PE means the market is now factoring in the same growth expectations from Indian companies that it did way back in 2005. Is it justified in doing so?

Views on this are divergent. Some fund managers believe the markets are being quite pessimistic and that the fall in valuations is more a function of poor liquidity, than of prospects for Indian businesses.
‘Time to buy’

Says Mr A. Balasubramaniam, Chief Investment Officer of Birla Sun Life Mutual Fund, “Valuations are extremely attractive, no matter what parameter you pick today — the price-earnings ratio, price to book value or dividend yield. In fact, market volatility is more of a concern now than the fundamentals of Indian companies. With oil prices correcting much more than expected, commodity prices falling and inflation worries receding, interest rates too may soften over the next few months. That means three major macro concerns will be out of the way for Indian companies. Liquidity will remain the only issue.”

He believes that while the next two quarters may be difficult for Indian markets, this remains a good time to buy stocks, as the “policy framework is also becoming more favourable to attracting capital flows.”
Earnings slowdown

Ms Srividhya Rajesh, Fund Manager at Sundaram BNP Paribas, holds a diametrically opposite view. “Though they look cheaper on a historic basis, the markets really aren’t cheaper today, because PEs have corrected. We see earnings deceleration next year. While some earnings downgrades have happened, a lot of it is yet to play out. When the earnings decelerate, PEs also will get compressed further,” she says, explaining why she would like to wait out this market fall

via Businessline