P/BV Ratio Analysis of Nifty in 2015 (Since last 16+ Years)

In continuation of the last post about P/E Ratio Analysis of Nifty since 1999, here is a similar analysis of Price–to-Book-Value Ratio. Like PE Ratio, I have been regularly tracking this 2ndindicator to gauge overall market sentiments at the State of Indian Markets on a monthly basis.

The data once again has been sourced from NSE’s website (link 1 and link 2) and starting from 1st January 1999. Ratio related data prior to this period is not available. So here is the result of the analysis…


The table above clearly shows that if one is investing in markets where P/BV < 3.0, returns over the next 3, 5 and 7 year periods have been in excess of 20%… i.e. 26.3%, 26.9% and 21.4% to be precise. On the other hand if investment is made when index P/BV exceeds 4.5, the returns have been quite unacceptable at 3.3% and 5.7% for 3 and 5 year periods.

Like we saw in previous post, this clearly indicates that when investments are made at high P/B levels, chances of sub-par (and even negative) returns increase substantially.

For your information, currently Nifty is trading at P/B Ratio of 3.8

But here is another interesting thing which can be observed. Even at a costly PB>4.5, if an investor stays invested for more than 7 years, then average returns are still a very decent 9.6%. And this shows that longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels (Caution: I am talking about index investing here and not individual stocks).

Below are three graphs to provide details of the exact Returns against the exact P/B on a daily basis (though arranged with increasing PB numbers).

The left axis shows the P/B levels (BLUE Line) and the right axis shows the Returns (in %) in the relevant period (Light Red Bars)





All three graphs clearly show that there is an inversecorrelation between P/B Ratio and returns earned by the average investor. Higher the P/B Ratio when you invest, lower the expected rate of return going forward.

After P/E Ratio Analysis and this post on P/B Ratio Analysis, next I will be sharing my findings on a similar analysis for Dividend Yield of Nifty for last 16 years.

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P/E Ratio of Indian Markets in July 2014 – Is It Telling Us Something?

I regularly monitor index ratios like price-to-earnings, price-to-book values to gauge overall market sentiments. I know it’s a very crude way of doing it. But still it provides a decent picture of what is happening in markets.

Now here is something interesting what happened on July 7th, 2014.

Nifty 50’s P/E multiple crossed 21 after almost 3 years. Surprisingly, last it stood past 21 was also on July 7th (2011). That’s exactly 3 years back!

Long term analysis (starting end of 1998) of Nifty’s P/E ratio tells the following story…
PE Ratio India 2014
We all know its common sense to buy low (Low PEs) and sell high (High PEs). And we also know that its difficult to do it. So if you go out and buy the index as whole when P/E multiples are less than 12 (quite low), then on an average, your probable 3 year and 5 year returns will be 39.5% and 29% respectively.

Similarly for index-buying during P/E multiples being in between 12 and 16, the 3 and 5 year returns are 28% and 25% respectively.

But we are currently in the band of 20-24. And this is not a cheap market at all. As per past data, your 3 year returns and 5 years returns look bleak at 4% and 7%. 

So does it mean that we sell all our stocks and put money in bank deposits?

The answer is I don’t know.

The above numbers are based on data of past 15 years. And there is no guarantee that past performance may be repeated. Or whether this time it might be different.

The last instance of PE21, for which 3 year returns data is available (May 02, 2011), the market gave a return of 5.3%.

Similarly for last instance of PE21, for which 5 year returns data is available (June 11, 2009), the returns were 10.3%. Not bad considering the superiority over returns given by safer ones, but also not eye-popping considering the optimism we have for next 5 years.
Now we are all quite hopeful that the new Indian government, if permitted by external uncontrollable like oil-shocks, natural-disasters, wars, etc… would be able to provide a conducive environment for India’s return to high growth days.

But having said that, I also beg to differ with those who believe that this would be achieved overnight and Sensex will hit 40000 by end of 2015.


As for the current markets which are rising everyday, it seems that they are now running ahead of the actual ground realities. But it is this over-optimism that gives us, the long term investors a chance. Isn’t it? 🙂

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Sensex @ 40,000 in next 2 years!!

In one of my recent posts about why I want Indian elections of 2014 to fail, I mentioned that due to recent run up in stock markets, experts were regularly coming out with one big target after another for Sensex.

Though I hate speculation, the fact is that we are all humans and its unavoidable. I hate it but I speculate every now and then. Very recently, I was fortunate enough to double my investment in MCX in just few months after company’s parent was caught in a crisis. Another stock which I believe can surprise in times to come is SAIL. I did two very detailed posts on why it was a good time to accumulate cyclical stocks like SAIL last year (2013). I still stand by that speculation. 🙂

Anyways, this post is a reaction to a report from a reputed research house, which thinks that Sensex would reach 40,000 soon. (Source)

 
Sensex Target 40000
Such Headlines are becoming common these days (Read: rising markets)

How soon?

If they had said 5 years, it would have meant a reasonable growth rate of 12.5% from current levels of 22,500. And this would have seemed quite achievable considering that chances of India getting a good, business-friendly political environment for next 5 years are pretty high.

But according to the news item, analysts of this research house feel that Sensex would reach 40K in less than 2 years!!  (Between 18 and 24 months to be precise)

This means a compounded annual growth rate between 35% and 48% for this period.

Is it possible?

I think it’s a little too optimistic and the research house is being Irrationally (Very) Exuberant. The current P/E multiple for indices like Sensex and Nifty stands at 19. And in case this target of 40,000 was to hold true by end of 2015, it would mean that earnings of constituent companies would have to grow at a rate in excess of 40%, just to keep the P/E of index at 19. And that too for two consecutive years!!

Now here we need to note two things:

  • P/E ratio of 19 is not cheap.
  • Earnings cannot grow at 40% for two consecutive years (Its not impossible, but its very tough)

Now, P/E Ratio for stocks (and indices) are calculated using below formula:

P/E Ratio Formula
Formula used to calculate P/E Ratios

So, in case earnings (denominator) don’t grow by 40%; but index (numerator) continues to grow at a rate in excess of 40%, then this would result in expansion (increase) in P/E ratio. This would mean that Sensex would become more expensive than current P/E ratio of 19. And stock market history tells that P/E multiples in excess of 20 to 24 are unsustainable and markets correct after reaching such levels.

But does it mean that Sensex cannot reach 40K in next two years?

No. Anything is possible.

But common sense says that its better not to believe the so called expert opinions which sound to good to be true.

What do you say?

Last 5 Years, Next 5 Years – A small study on Indian Stock Markets

Everyone interested in stock markets these days has following perception:–
Markets have not done anything in last 5 years. The index has not moved anywhere at all!!
And that is true. Numerically speaking, markets seem to have done almost nothing in last 5 years (2008-2013).
Now it seems sensible & obvious that one should buy low and sell high. But what should one do when markets have not done anything substantial in last few years? And we are not talking about individual stocks here. We are talking about broader markets. The indices. Individual stocks can take an altogether opposite trajectory than the market.
To answer this question, we decided to look back into the past. We analysed Nifty’s data for last 22+ years (1990-2013). We checked this data for two things:
  • Returns during last 5 years (for everyday since 1995)
  • Returns during next 5 years (for everyday till 2008)

And what we found is summarized in table below –
 

Returns in last 5 Year – Returns in Next 5 Years – Correlation

What the above table means is that – “If returns of last 5 years are not great, chances of having great returns in next 5 years are pretty high.”
Now that should bring a smile on faces of those who keep cribbing about poor returns in last 5 years. 🙂
So will the market give stellar returns in next 5 years (2013-2018)? The answer is that we don’t know. But as per historical data, chances are quite high.

So, will you take chances now? Will you go ahead and invest for next 5 years? What will you do?

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Large Cap Nifty Stocks – Returns since our call in December 2011

Important: Don’t miss the last paragraph.


When we wrote Large Cap Nifty Stocks available at deep discounts in December 2011, we were very excited to find a number of great companies available at very cheap prices. And since the world as well as Indian economy hadn’t fully recovered, it was really common sense that one stuck with businesses which could weather the economic turmoil. We advised and bought a few of these large caps for our personal portfolios.

So after an year, when index has given 25% returns, we checked the performance of individual stocks. And we must say that we are more than happy to see around 15 stocks giving 40% + returns. But there are a fair number of duds too. There are 10 stocks which trade at discounts compared to December 2011 prices.

Large Cap Nifty Stocks Returns One Year
Nifty Stocks: One Year Returns (Dec 2011 – Dec 2012)
As of now, markets are trading at a PE of close to 19 and since markets have run up around 800 points in last 4 sessions, we are not sure if it’s a good time to pick stocks. We would rather wait and watch for the time being.

Caution: Our post might make you believe that we have good predictive capabilities. The fact is that we don’t. Why? Markets have risen 25% in last one year. So have all stocks representing the market. And as Warren Buffett said: A rising tide lifts each and every boat. You only find out who is swimming naked when the tide goes out.

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Best Nifty Stocks and 3 questions that let us shortlist them

Taking cues from Morgan Stanley’s ‘Connecting the Dots’ (June 2012), we decided to shortlist our own set of dependable stocks. For this we used following filters –


Filter 1: Is the Sales growth faster than nominal GDP growth?
This can be achieved by either being a part of a fast growing industry and/or gaining market share within the industry.

Filter 2: Is Profit growth faster than Sales growth?
This signifies a combination of several dimensions like market dominance, pricing power, better cost management, judicious investments and right mix of debt and equity.

Filter 3: Is Earnings per Share (EPS) growth broadly in line with Profit growth?
This signifies that growth and capital efficiency are linked. This also indicates whether an individual shareholder participates proportionately in company’s growth or not.

After shortlisting stocks by using the 3 filters, we added information about Return on Equity (RoE), Debt/Equity (D/E) & Dividend Yield (DY) as these are information which should be looked into before taking a final call to buy any stock.

We started with a universe of 50 safe large cap stocks which form the Nifty50. After putting Filter 1, we were left with 35 stocks. On putting Filter 2, we were left with 19 stocks. Final filter resulted in shortlisting of 13 stocks, which met all three criterias.

During last 3 years, average sales growth of these 13 stocks was 22.10%, which was much above the nominal GDP growth rate of 13 percent. Average Profit growth for these stocks was 31.40% & EPS grew at an astounding CAGR of 33.40%.

So, without much delay, we present the 13 rock solid and dependable stocks of Indian markets…
  • TCS
  • ITC
  • HDFC Bank
  • Wipro
  • BHEL
  • Power Grid
  • Bajaj Auto
  • Kotak Mahindra Bank
  • Axis Bank
  • Hero Motocorp
  • Asian Paints
  • Bank of Baroda
  • IDFC

How these 13 stocks fared on 3 criterias is detailed in table below –

During the last 3 years, an investment made in portfolio of these 13 stocks would have given a market beating return of 17.90% (CAGR)

Only one stock, BHEL, gave negative returns (-17.34%) in this period. Overall market returned a meager 3.73%. This portfolio outperformed the market by 14% + (!!).


A snapshot & analysis of all 50 stocks can be found below. Please click the image to enlarge.

Click to enlarge
Caution – This is not a recommendationto BUY any of these stocks. We have not considered valuations of these stocks in the post. So do your due diligence before buying any of these stocks. Also, past performance is no guarantee of future results.

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Nifty Dividend Yields – A Long Term Analysis of relation between dividend yields and returns

Dividend Yield is a ratio of dividend paid last year to current market price. A further reading on Dividend Yields can be found here.
 
One of the two metrics used to evaluate over- or under-valuation of markets is Dividend Yield (Other is P/E Ratio). At present (Mid January 2012), Nifty has a dividend yield of 1.6 (find latest data here).
 
So is this a right time to invest? We at Stable Investor decided to look into index’s history to answer this question.
 
Analysis of Nifty’s last 13 years data (from 1st Jan 1999 onwards) reveals a few interesting points –
  • Returns during last 13 years, when segregated on basis of Dividend Yields are –
 
  • This clearly indicates that at current Dividend Yield of 1.6, chances of earning around 20% per annum for next 3 years are quite high! (Caution – The statement is made on basis of historical data. Past performance is no guarantee of future performance.)
  • A graph between Dividend Yields and 3-Year-Returns (CAGR) also shows that there is a high (positive) correlation between the two. Higher the dividend yield, higher the returns over 3 year periods.
Dividend Yield & Return Since 1991 [Click to Enlarge]
  • But one must understand that market does not give enough chances at higher levels. Our analysis shows that out of 2500 trading sessions in last 13 years, markets spent less than 5% (127 days) at dividend yields of more than 2.5 (which offers maximum returns over 3 year periods).
Days Spent on various Dividend Yields
 
So after this analysis, Stable Investor understands that though history shows that investing in markets offering high dividend yields makes more sense, one should never rely on just one mathematical tool to arrive at any investment decision. Any number should be taken with a pinch of salt and should always be looked in conjunction with other ratios and numbers.
We did a similar analysis of PE Ratios and Returns over 3 and 5 year periods and arrived at some remarkably useful results which can be found in the post Relation between PE Ratios and Returns.
If you are interested in further exploring slightly advanced topic of Effective Dividend Yield, please read our post on Dividend Investing in Indian Stocks.

Nifty Stocks and PEG Ratios

In our previous post, we saw that Indian markets are presently trading at PEG ratio of 0.97. We arrived at this figure by dividing current P/E of 16.7 by average growth rate (in last 18 years)of 17.1%.

For details, please check the post on Historical EPS Growth Rates & PEG Ratio of Indian markets.
In continuation of our analysis of PEG ratios, we calculated PEG ratios of a few Indian large cap stocks –
Click to enlarge
Some details/observations of our analysis are as follows –
  • We have chosen EPS growth rates to represent growth rates of a company. One can also use any other growth rates.
  • For each company, we have calculated 3 PEG Ratios –
    • Using latest EPS Growth Rates (2010-2011)
    • Using Average of all EPS growth rates in last 5 years
    • Using least positive EPS growth rates in last 5 years
  • Afterwards, we calculated another PEG for each company – Average PEG – which is an arithmetic average of previous three PEGs.
 
  • Normally, a PEG greater than 1 indicates an overvalued company, and less than 1 indicates an undervalued company. But we must understand that PEG is just a ratio and it should always be looked in conjunction with other ratios and numbers.
  • For instance, a company like Bharti has an average PEG of 0.33, which is quite an attractive number when looked at on a standalone basis. But if we consider that Bharti operates in a highly competitive industry; has loads of debt due to 3G fee payments and African expansion; has decreasing average revenues per user (ARPU) and has a negative PEG(!) for current fiscal, the number 0.33 may not look so attractive.
  • But there are also few companies like BHEL (0.59), PowerGrid (0.83), Tata Steel (0.40) and Tata Motors (0.42) which have considerable moat (competitive advantage & operations in industries having high entry barriers) and can be said to be available at good valuations. But once again, one should understand that stock like Tata Motors are rate sensitive and cyclical. And under current global circumstances, may slip further.
  • A company like Sterlite Industries (pegged by few as future RIL) is available at a ridiculous PEG of 0.19 (or 0.25, 0.08, 0.26). But that does not mean that it is going to become a future multibagger. Similarly, Maruti is available at PEG of 0.10(!)
  • Then there behemoths like SBI which may be available at outrageous mathematically calculated PEG of 6.6, but are worth investing as there current PEG stands at 0.54. But one should also consider rise in NPAs of SBI and other factors before investing.
So a Stable Investor understands that one should never rely on just one mathematical tool to arrive at any investment decision. Any number should always be looked in conjunction with other ratios and numbers.