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State of Indian Stock Markets – June 2016

This is the monthly update of the state of Indian stock markets. As of now, it comprises only of an analysis of Nifty50‘s ratios, namely P/E, P/BV ratios and Dividend Yield.

But before that, lets see what happened in June 2016, which was a month of exits.

RBI Governor Raghuram Rajan said No to a second term and instead, has decided to return to academia (lucky him!) after his term ends in September. Read his address to RBI staff here.

People termed it as Rexit (= Rajan + Exit). I am a fan of Mr. Rajan for his sensible views and how he took a tough approach towards cleanup of PSU banks. Personally I think that having him around with the current PM in driver’s seat, would have been great for the economy. But life moves on and so will the Indian economy.


Then people of Britain decided to do a Brexit (= Britain + Exit) from the European Union (EU).

In short term, Indian markets were expected to react negatively to the news of Rexit. But that did not happen. Tells how brutal the markets can be towards people’s expectations. 🙂 As for the Brexit, there was a knee-jerk reaction when indices fell more than 2% in a day (might look like a big drop in short term but is nothing when long-term is considered). Some stocks whose business is dependent on British and European economy, witnessed far deeper one-day cuts. But markets seem to have recovered since then. Experts are still trying to predict the consequences of Brexit. But no on seems to be sure about the actual impact. Whether it will result in a mild recession in UK or whether government will eventually disregard people’s verdict in referendum and stay back in EU – no one knows anything.

Coming back to the state of our own markets…

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The heat maps don’t show the maximum and minimum values of each month.

Caution – Please remember that relying solely on averages can be risky. Its like a 6-feet person drowning in a river which had an average depth of 4-feet. 🙂

Don’t make any investment decisions based solely on just one or two ‘average’ indicators. At most, treat these heat maps as broad indicators of market sentiments.

So here are the Heat Maps…


P/E (Monthly Average)
Price to Earnings Nifty June 2016

P/E Ratio (on last day of June 2016): 22.75
P/E Ratio (on last day of May 2016): 22.60


P/BV (Monthly Average)
Price to Book Nifty June 2016
P/BV Ratio (on last day of June 2016): 3.37
P/BV Ratio (on last day of May 2016): 3.40

Dividend Yield (Monthly Average)
Dividend Yield Nifty June 2016
Dividend Yield (last day of June 2016): 1.25%
Dividend Yield (last day of May 2016): 1.32%


You can read about last month’s update hereThe State of Markets section has also been updated (link).

For detailed analysis of the relation between investments made at various P/E, P/BV and Dividend Yield levels and the historical returns, please have a look at these 3 posts:


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State of Indian Stock Markets – May 2016

This is the monthly update of the state of Indian stock markets. As of now, it comprises only of Nifty50’s P/E, P/BV ratios and Dividend Yield.

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The maps don’t show the maximum and minimum values of each month.

Caution – Please remember that relying solely on averages can be risky. Its like a 6-feet person drowning in a river which had an average depth of 4-feet. 🙂

So do not make any investment decision based solely on just one or two ‘average’ indicators. At most, treat these heat maps as broad indicators of market sentiments.

So here are the Heat Maps…


P/E (Monthly Average)
Nifty PE May 2016


P/E Ratio (on last day of May 2016): 22.60
P/E Ratio (on last day of April 2016): 21.24


P/BV (Monthly Average)
Nifty PB May 2016

P/BV Ratio (on last day of May 2016): 3.40
P/BV Ratio (on last day of April 2016): 3.27

Dividend Yield (Monthly Average)
Nifty Dividend Yield May 2016

Dividend Yield (last day of May 2016): 1.32%
Dividend Yield (last day of April 2016): 1.37%


You can read about last month’s update hereThe State of Markets section has also been updated (link).

For detailed analysis of the relation between investments made at various P/E, P/BV and Dividend Yield levels and the historical returns, I suggest you have a look at these 3 posts:
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State of Indian Stock Markets – April 2016

I regularly update the State of Markets section (link) on Stable Investor. This time when I updated it, I took a step further and decided to try and publish heat maps for 3 popular ratios (P/E, P/BV, Dividend Yield) of Nifty 50, on monthly basis.

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The maps don’t show the maximum and minimum ratios of each month.

As with any such ‘average’ indicators, its worth saying that you should not make any investment decision, based solely on just one or two indicators. At most, these heat maps should be treated as broad indicators of market sentiments.

So here are the Heat Maps…



P/E (Monthly Average)


Nifty Historical PE Ratio
P/E Ratio (on last day of April 2016): 21.24


P/BV (Monthly Average)


Nifty Historical PBV Ratio
P/BV Ratio (on last day of April 2016): 3.27%


Dividend Yield (Monthly Average)

Nifty Historical Dividend Yield
Dividend Yield (last day of April 2016): 1.37%

For detailed analysis of what have been the historical returns for investments made at various P/E, P/BV or Dividend Yield levels, I suggest you have a look at these 3 posts:
I am planning to see whether I can also bring in data for some other mid-cap / small-cap indices from next month. Do share your feedback and help me improve these monthly State of Indian Stock Market posts.
 

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.

IOCL’s Disinvestment & How You Can Benefit From It?

Almost a year back, I had done a case study on Indian Oil Corporation Ltd. The study was an exercise to find a correlation (if any) between company’s share price and its book value per share. And surprisingly, this graph showed something interesting. To cut the long story short, it clearly showed that share prices of IOCL (almost) never stayed below its book value for too long.

So with prices hovering near 200 and adjusted book value of 250+, it seems that it might be a good time to look at this stock again.

The first thing which I decided to do was to update the graph between IOCL’s share price and book value per share. And as expected, this is what I got…

Indian Oil Corporation IOCL Book Value
IOCL || Worth A Second Look

During the last 15 years, share prices of IOCL have dropped below its book value only thrice. Once during the dot com bust of 2000-01, in crash of 2008-09, and now. And presently the Price/Book Value stands at a pathetic 0.75.

But this does not mean that prices cannot fall any lower. They can go down further. But also, the chances of Book Value going down are very remote. Even if we assume a nominal 5-8% annual increase in book value, the price at which shares are available seems to be quite cheap.

So why is it that IOCL is available at such low P/BVs? We can discuss and debate about various possibilities. But I feel that it makes more sense to find indicators which support the view that shares are indeed available at cheap prices. Or rather try to find reasons which might suggest that our hypothesis is not correct. Let’s see…

I have experience of working in oil industry and I feel that Oil Marketing Companies are currently trading at huge discounts to their intrinsic value. I agree that government is the sole decision maker in these PSU companies and we know how the government operates. And this fact in itself would shave off a decent chunk of intrinsic value from the shares of this company. 🙂

Crippled By Politics & Government

But you cannot deny the presence of massive refineries and oil pipelines. And just to give you all an idea of cost of building refineries, just head to this link to see costs of various projects being taken up by these Oil Marketing Companies. Just the cost of putting up a new refinery is in excess of Rs 30,000 crores!!

But on stock exchanges, the entire company which owns 10 such refineries is available for just Rs 50,000 crores. And I haven’t even taken the cost of laying more than 11,000 kms of oil pipelines. Nor have I taken into account the country wide network of retail outlets and a decent overseas presence in Mauritius and Sri Lanka!

And if one closely monitors the energy space, one would understand that it is now almost inevitable that subsidization of fuel would be handled more prudently by the government in years to come. And going forward, with reduction in subsidies by government & various caps on LPG cylinder’s domestic consumption, there is a decent possibility that OMCs like IOCL would benefit in the long run. But this would not happen overnight. And patiencewould be a key here. Agreed that with elections around, there might be temporary vote seeking measures like increasing the no. of subsidized cylinders, etc by the ruling parties. But things are changing on the energy administration space. And in due course of time, these subsidies would play much smaller role when people evaluate the oil companies. 

(Caution: The paragraph which you just read is full of speculation).

Another indicator of stock’s undervaluation is the ongoing discussion on disinvestment. The Petroleum Ministry has summarily rejected Department of Disinvestment’s idea of a stake sale. The reason being quoted is huge undervaluation of shares. But govt seems to have decided for stake sale and may eventually go ahead with sale of its stake to other energy companies like ONGC, OIL, etc. In past too, government has resorted to the so-called cross-holding route to shore up its revenues.Or the government might try the ETF basket route (source). But all-in-all, this indicates that prices are quite low, and even if they were to go down a little further, which is of course possible considering the overhang due to disinvestment and other election-related-factors,  it might be a good idea to accumulate this stock for long term. If not for appreciation, then for a decent dividend yield going forward.

Note – This post should not be considered as an advice to buy shares of company discussed above. 

Disclaimer – Long term positions in IOCL.

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IDFC – A long term investment worthy business

From a high of 185 in January 2013, IDFC has grinded down to 128. That’s a fall of close to 30% for a large cap financial institution.

We like IDFC as a good long term portfolio pick. So this 30% correction has tempted us to do an analysis of the company. And with Banking Licenses being the hot topic, we give our two cents that it is quite possible that IDFC may get one by next year. But what we just said is mere speculation. Don’t believe us. 🙂 This is because there is a high probability that someone on the inside knows something about the licenses and hence the stock has corrected so much(!)

So, for the time being, we keep aside IDFC’s banking foray and look at its existing businesses and valuations compared to historical averages.

IDFC



IDFC is an infrastructure finance institution providing end to end financing and project implementation services. The company also provides advisory, PE and AMC services to name a few.

Sales

Company grew at a fast pace during the last decade. Its sales have increased from 424 crores in 2003 to around 6100 crores in 2012. That’s a CAGR of around 34%. Company came out with its IPO in 2005 at Rs 34 per share. Since then, sales have increased at a similar rate of 35% per annum.

IDFC Net Sales
IDFC – Net Sales (2003-2012)

Profits

During the same period, profits have grown from 180 crores to 1600 crores at rate of 27% plus.

IDFC Net Profits
IDFC – Net Profits (2003-2012)

EPS & Dividends


Earnings (per share) have moved up from 1.8 to 10.3 in 2012. In line with EPS, dividends have started increasing in recent past and now (in 2013) stand at Rs 2.6 per share. In last 5 years (barring 2009), company has continuously increased its dividend per share (1.2, 1.2, 1.5, 2.0, 2.3, 2.6).

IDFC EPS Dividend Per Share
Earnings & Dividends Per Share (2003-2012)

The dividend payout ratio has also stabilized in the band of 20-23%, which is decent considering the high growth rate of company’s business. A detailed comparison between EPS, DPS and their respective growth rates can be found in table below-

IDFC EPS Dividend Per Share
Detailed EPS & DPS Data – Growth Rates & Assumptions

IDFC is a financial institution and hence it makes more sense to analyze company’s Price to Book Value to gauge how over- or undervalued the company is.


Price/Book Value & P/E Ratio Analysis

Company has grown its book value from 16 to 81 in last ten years. That’s a CAGR of more than 20%.

IDFC Book Value
Book Value Per Share (2003-2012)

We analyzed historical data to check the P/BV multiples at which IDFC has traded. Average P/BV after listing (in 2005) for IDFC stands at close to 2.3. Also it has oscillated in a P/BV range of 1.0 to 5.0. At present, the stock is available at a P/BV of 1.6. That itself points to a 30% undervaluation from historical averages perspective.


If you look at Price to Earnings multiple too, average PE commanded by IDFC is close to 16. The stock currently trades at a PE of less than 11 (TTM). And if you are enterprising enough to consider future earnings, then stock is available at a forward PE of 9.2 (FY 14) & 7.7 (FY 15)! And a PE of 8 is considered apt for a no-growth company. 🙂

Below graphs show how IDFC is currently positioned on parameters like P/E & P/BV when compared to its historical averages and FY 14 & 15 estimated figures.

IDFC Price to Book Value PBV
P/BV Comparison – Current, Historical Average & Estimated (2014,  2015)
IDFC Price to Earning Per Share PE
P/E Ratio Comparison – Current, Historical Average & Estimated (2014. 2015)

Final Words


The company, though well managed and growing at a decently fast pace, seems to be undervalued. We have not analyzed management, business, etc as this post was more to do with valuations based on simple historical parameters. But being headed by Deepak Parekh and his team, it is assumed that management would be doing a decent job. In case you are interested in understanding more about the business, management and other factors, we suggest a simple Google search. It will throw a plethora of brokerage reports analyzing the same. You can also access company’s latest Annual Report here.

Now with a sustained ROE of close to 15%, a business like IDFC’s should command a multiple higher than what it currently trades at. And though we love dividends, we don’t expect IDFC to dole out generous dividends to its investors due to its fast growth. Even then the stock is currently available at a decent yield of 1.8%. And with dividend growing year on year, this Yield-On-Cost is bound to increase in future.

But remember one thing, IDFC is interested in getting a banking license. And there are high chances that it might get it. But we cannot be sure of this unless we are in RBI’s decision making committee. 😉 So if you do invest in the company, be ready to accept volatility in its share prices due to negative or positive news flow.

Disclosure – No positions in IDFC.

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A Case Study on Balmer Lawrie & Co., its Book Value, Dividends & how to decide when to buy this stock?

After doing case studies on ONGC and IOC, we chose another company from our Dead Monk’s Portfolio for case-based analysis. But before we get down to details, just have a look at the 2 graphs given below. One shows increase in book value per share during the last 10 years. The second shows increase in dividend per share during the last 10 years.

 
Book Value Per Share (2000-2013)
 
Dividends paid per share (2002-2012)
 
The company in discussion is Balmer Lawrie & Co. It has continuously increased its book value from Rs 101 (2003) to Rs 423 (2013) at a CAGR (what is CAGR?) of 15.4%
 
It has also increased its dividend per share from Rs 1.80 (2002) to Rs 28 (2012) at a compound annual growth rate of an astonishing 32%. Even if you consider the last 5 years, growth rate has been a market beating 16%.
 
In India, dividend stocks do not get the respect they deserve. A similar stock in US markets would have definitely found a place in USA’s coveted list of great dividend stocks: S&P Dividend Aristocrats.
 
But this is India. 🙂 So lets move ahead with our case study…
 
What does this strangely named Indian company, Balmer Lawrie & Co. do?? We haven’t even heard about it…
 
Almost 8 out of 10 people involved in stock markets have not heard of this name. People don’t even know about the existence of this company. And even if they do, they don’t understand the rationale behind the name, let alone the heterogeneity among its business verticals. So let us first introduce the company to you.

Balmer Lawrie & Company was started by 2 Scotsmen, Stephan Balmer & Alexander Lawrie in 1867. Yes, the company is 146 years old!! As of today, it is a Public Sector enterprise under the control of Ministry of Petroleum & Natural Gas. So here we have a debt-free PSU with turnover of Rs 2100+ crore, which we never knew of. 🙂

The company operates its businesses under 5 heads – Tours &Travels, Industrial packaging, Logistics, Lubricants & Others (engineering products, tea packaging, leather chemicals, etc). You can read more about the company here.
 
How has Balmer Lawrie increased its book value and how this data can be used to enter this stock?
Stock Price & Book Value Movement (2003-2013)
The red blocks in above graph are book value per share over the last 10 years. As already discussed in earlier graphs too, it has been on a constant uptrend since last 10 years. On the same axis, we plotted the share prices. And it is not very difficult to see that book value has acted as a strong support for the stock price (a similar pattern was found in our analysis for Indian Oil). The stock price has rarely fallen below its book value. And when it has, it has almost always moved up into higher zones.
 
Can we use Price/Book Value as a parameter to check stock valuations and as a criteria to enter this stock?
Correlation between P/BV & 5 Year Returns
The graph clearly shows that lower the Price/Book Value per share, higher have been the 5 year returns. So you have the answer to the question. 🙂
 
Assuming Balmer Lawrie maintains its generous dividend payout policy, how can we use Dividend Yield as criteria to enter this stock?

If we see historical averages, the company has maintained an average dividend yield of 3.2%. The yields hit a historic high of mouth-watering 8.2% when markets crashed in March 2009. But it quickly moved back to more ‘normal’ levels of 3% to 4%. (see graph below)
Dividend Yields – Average, Highest, Lowest (2003-2013)
To check whether there exists some correlation between dividend yields and 5 year returns, we plotted a graph between these 2 parameters. And the result is summarized by one statement and graph below –
Correlation between Dividend Yields & 5 Year Returns
Higher the yields, higher the returns. 🙂
 
As we have warned in all our previous investment case studies too, please do remember…

…that above approach uses just 2 parameters, P/BV & Dividend Yield to decide about when to buy the stock. You as a reader should remember that there is a considerable difference between real life and case study. One should never invest based on just one or two parameters. This case should not be taken as an investment recommendation. Do your own research before investing your hard-earned money.

A Case Study on IOC (Indian Oil) & why its Book Value can be used as a criteria to buy the stock?

Our last case study on ONGC & analysis of 9 year old investment in its IPOhad us exhausted. 🙂 And with 1600+ words, even our readers were exhausted. 🙂 We even received a mail asking us to reduce the size of our future posts!! So we decided to keep this case study a little shorter.


Indian Oil (IOC) is India’s biggest public sector oil refiner. Unlike ONGC, Oil India & Cairn India which are in business of oil exploration and production, IOC is in business of crude oil refining and marketing of petrol, diesel, kerosene, ATF, etc. You can read more about the company here

Though we haven’t included IOC in our Dead Monk’s Portfolio, we do hold it in our personal portfolio for its high dividend yield. It has been consistently paying dividends for last 14 years.

Indian Oil Logo
In this case study, we try to look at the following issues:

  • We look at how IOC has increased its book value per share over the last 14 years. How this data can be used to make decisions about when to enter this stock for long term?
  • What are the rolling 3 & 5 Year returns of the stock and its relation with P/BV ratio?
  • We also look at reasons as to why this approach might fail.

How IOC has increased its book value and how this data can be used to enter this stock?
Indian Oil Book Value
IOC’s Book Value has been a support for its stock price
The red line in above graph is IOC’s book value per share (adjusted). As evident, it has been continuously increasing over the evaluation period (10+ years). It is similar to a series of steps. On the same axis, we plotted the adjusted share price (blue line0.

And it is not difficult to see that in past, book value has acted as a strong resistance for the stock price. Pardon us for borrowing a term (resistance) from the trading community. 🙂 But the trend is actually ‘un’missable. The stock price has rarely fallen below its book value. And when it has, and if an investor went ahead and bought the shares, he has been handsomely rewarded. You may say that in past, we have been against timing the markets. But here we are advocating the same. True. We don’t feel that it is worthwhile to time the market unless and until you have some insider information. But if you are a disciplined investor, who invests regularly, it makes sense to periodically boost your portfolio returns, by buying good stocks when they are available at multiples below historical averages… Isn’t it?

What are the rolling 3 & 5 Year returns of the stock and its relation with P/BV ratio?

To check the relation between returns & P/BV Ratio, we plotted two graphs. One between P/BV & rolling 3 year returns and another between P/BV & rolling 5 year returns.
ioc returns and book value 3 year
3 year Rolling Returns & P/BV per share of IOC

ioc returns and book value 5 year
5 year Rolling Returns & P/BV per share of IOC
On X-Axis, P/BV Ratio has been plotted on an increasing scale. On Y-Axis, returns (CAGR %) have been plotted. And as evident from the graphs, an investment at lower P/BV values (towards left part of x-axis) in IOC’s stock has resulted in higher returns. The scatter in the graph is downward slopping. Simply speaking, if one invests in IOC’s stock at low P/BV multiples, then probability of high capital appreciation is very high.
Why this approach might fail?

A few immediate concerns about this approach are as follows:
  • This approach relies solely on the stated book value of the share. And book values can be inaccurate because they do not always reflect the true networth of a company. This can be attributed to use of different accounting methods for items like depreciation, which can significantly affect the book value.
  • The above book value based approach does not give any weightage to company’s management (appointed by government of India in this case). And though oil prices (in particular petrol) have been deregulated, govt. still has a shadow control over the prices. But in last 2-3 months, things have started looking brighter for oil companies like IOC.
  • Another issue with this approach is that it does not evaluate alternatives available within the sector. For example, there are other refiners like HPCL, BPCL. And BPCL itself has profitable interests in oil exploration business too.


Please remember…


The above approach uses just one parameter (P/BV) to evaluate the stock. You as a reader, should remember that this is just a case study. Real life and case studies are generally out of synch. 🙂 One should never invest based on just one parameter. This case should not be taken as an investment recommendation. Do your own due diligence before deciding about where to invest your hard earned money.

Disclosures: Long term positions in Indian Oil, Cairn India & ONGC. No positions in HPCL, BPCL or OIL.
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