Equity – Is it the right time to buy? December 17, 2008
Posted by dhirendra1972 in Bluechip Companies, Book Value, Book Value Approach, Bull Market, Current market meltdown, Earning Approach, Equity Investment, Future Growth.Tags: Approaches, Companies, Earnings, Economy, Equity, Growth, Investors, Meltdown
add a comment
The current market meltdown has left investors shocked and stunned. The important question in everyone’s mind today is does the market have further downside left or has it bottomed out? Nearly everyone is offering some or the other opinion on this question. The economy has posted a growth of 9% in FY08 and the future growth, although slower, is expected to remain around 7%.
Earnings Approach
We expect earnings per share of Sensex companies to remain in the range of Rs 900-950 levels in FY09. FY 10 is likely to post a negative return of around 20%, though the picture will become clearer after the Q3 results come out in January.
The current level of Sensex implies 10.0 x – 9.4 x P/E of FY09 earnings and probably around 12.5x – 11.3x of FY10 earnings. Historically, since 1991, Sensex has traded in the range of 10-30 times one year forward earnings. So, currently the Sensex is certainly at the lower range of the historical P/E band. Even if things are likely to be different this time due to a worldwide recession, we do not expect more than 20% downside from these levels.
Book Value Approach
Also, if we consider the book value of companies, many bluechip companies are trading below their net worth. Moreover, the current P/BV (Price to Book Value) of Sensex is hovering around 2.3 which is in the range of historic lows of 2-2.4. In last 18 years, whenever the P/BV ratio had drifted to around 2, it has been followed by a smart pull back. For example, in November 1998 when Sensex fell to around 2800 levels (P/BV of 2), the next six months witnessed a strong pullback rally of more than 40% pushing the index to 4000 levels.
Ref: theeconomictimes
