ARE THE INDIAN MARKETS TOO EXPENSIVE?

By Ruma Dubey

A relative recently asked the usual question which we all working in the field of stock market often get asked, “So market kaisa lagta hai? What to buy?”

Once you start answering the questions, it’s like a never ending tirade. And after you have given satisfactory answers and named a few stocks (all from our Stock Recommendation section), you think its over? No, then the question comes, “when to buy?”

The BSE Sensex today closed at 28,000 and is trading at a PE of 20.54, way above  the 10-year average PE of 16.8. The BSE EPS for FY16 was at Rs.1330 and this was once again way, way above the 10-year average of Rs.962.

This makes it one of the most expensive markets today. This PE of an index is calculated by dividing the index level by total earnings per share. The reason for such a high PE is the rally in stocks due to hope that India's economy will again start growing at a fast pace and GST will soon become a reality, which many expect it to happen on Wednesday.

Actually, this is a very genuine concern – when to enter a stock?  Say you want to buy Bodal Chemicals? It’s a very good choice but the question is - is it worth it at the current rate, which is close to its 52-week high of Rs.119. How much upside does that leave one with when you buy it close to a stock’ high?  Biocon hit a life time high today at Rs.840 or Bajaj Finserv, that too hit a  life time high at Rs.2872.55. Balrampur Chini hit a new 52-week high today at Rs.138. Harita Seating, HeroMoto, Hind Petro, BPCL, Havell’s, HDFC Bank…. the list is long today.

The big confusion is always about when to enter a stock. Like Biocon. It is at its life time high; entering at this juncture, how much gain does it leave for one on the table? Or will I miss the bus if I do not catch it at this high price?

First the second question. When you know it is at a life time high, much more gain can one expect immediately? At higher rates, when it consistently moves up, profit booking always comes in. And when it falls, that’s the time to pick up and not when ruling at its high. This is purely with a long term investment perspective but if one buys around Rs.800 today, you know for sure that in next 2 years maybe, you are looking at a four digit price as its fundamentals will only get better.  

In fact Waren Buffett has his own “Buffett Indicator” which shows whether the valuation is high or low and the formula is simple – divide the stock market capitalization by the country’s GDP. If the percentage falls to 70% or 80%, it’s a good time to buy as returns will be good but if the ratio is around 200%, then indeed, you are playing with fire.  

Putting this into the Indian context, the market cap at end of July stood at Rs.106.84 lakh crore and GDP for FY16 is at Rs.135.65 lakh, giving a ratio of 79%. This is on the higher end of what Buffett thinks is good but at the same time, it does not mean it has peaked yet. It has historically, gone up more than this thrice – once in 2007, which was just before the crash at 145% and then in 2009 at 96% and 95% in 2010. So in terms of valuation, yes, stocks are the higher end of the pricing but not yet near a peak if one were to go by past indicators.

Having said that, it does not mean one enters stock scaling new highs or hovering around its high points. Wait for a fall; that is inevitable post the GST event as all the built up euphoria will settle down and look ahead for the next trigger. Make every fall a good opportunity to buy into good quality stocks.