As Sensex, Nifty hit new highs, here’s what the P/E ratio tells us about the markets
India’s two principal stock market indexes—the BSE Sensex and the Nifty50—are at record highs. On Wednesday, the Sensex crossed the 56,000 level for the first time while the Nifty50breached 16,700.
Although the market is trading at lifetime highs, retail investors face the vexed question that rears its head each time the indexes are buoyant: Is the market too expensive to put in fresh money or should they wait for a fall?
Analysts suggest that investors should look at some key metrics before they decide on whether they want to take fresh bets or hold off till the market corrects.
One key factor to consider is the price-to-earnings (P/E) ratio. The PE ratio essentially indicates how many times the actual or anticipated annual earnings the stock of a company is trading. It shows whether a stock is overpriced or underpriced, and whether it is worth investing into. The P/E ratio is a function of the anticipated earnings growth that a company could see in the quarters and years going forward.
A counterintuitive trend
As of August 13, the Nifty was trading at a P/E ratio of 26.51x. This is actually lower than the 42x levels in February.
So, why has the P/E ratio fallen when the markets are at record highs?
Counterintuitive as it may sound, there actually are good reasons for this fall in the P/E ratio in the last six months.
For one, a change in how the ratio is actually calculated. Earlier, the P/E ratio for Nifty was calculated based on standalone earnings per share (EPS). Now, it is calculated based on the consolidated EPS. This makes a big change, as it takes into account earnings of unlisted subsidiaries.
Second, India Inc has seen a growth in earnings over the past several months since the economy has opened up after the national and myriad regional lockdowns disrupted it throughout 2020 and the beginning of 2021. Analysts say that since February, investors have seen earning announcements of two consecutive quarters, and the numbers have been looking up.
“Since February 2021, we have had the advantage of two quarters of earnings announcements, and they are on the higher side in comparison to the previous quarters,” Gopal Kavalireddi, head of research at FYERS Securities, told Moneycontrol.
Liquidity and future outlook
Yet another factor that should be considered is the liquidity situation and how the future looks.
Liquidity is essentially a measure of how readily deployable cash is available. Analysts say that such levels of liquidity influx have not been seen before in the Indian markets.
Will the P/E ratio continue to fall?
Market watchers certainly think so. They say that as political tensions between India and China have eased, at least for now, and the prospects of future earnings look good, the P/E ratio should continue to inch lower.
Shrikant Chouhan, executive vice president at Kotak Securities Ltd, told Moneycontrol, that the Nifty is trading at 22.4 times the projected earnings of 2021-22 and 19.5 times the estimated earnings of FY23. He expects Nifty50 earnings to grow by 29.2% in FY22 and by 14.8%the following year.
“From now, till the end of FY22, we expect modest returns from the Indian market, considering the strong economic recovery and gradual increase in global and domestic bond yields,” he said. “By the end of FY22, investors would start discounting FY23 earnings.”
Road stocks in the fast lane as govt orders jump
On August 15, while addressing the nation from the ramparts of New Delhi’s Red Fort, Prime Minister Narendra Modi reiterated his government’s resolve to invest Rs 100 trillion into India’s infrastructure sector and transform the transportation sector.
While governments are often notorious for making outlandish claims and devising grandiose schemes that often never fructify, it does appear that some of the promised money has indeed been flowing into the country’s roads sector.
Lion’s share of projects
The Economic Times reports that, among the major infrastructure segments, the roads sector has received a lion’s share of the government’s largesse, with projects worth Rs 22,000 crore being awarded between January and July this year. This, the report says, was three times the figure during the corresponding period last year.
To be sure, a direct comparison may be slightly misleading, as the country was under a nationwide lockdown between the end of March and May last year, and most, if not all, contracting had either come to a halt or had been severely curtailed.
Moreover, since almost the entire labour force had been displaced, project execution was at a virtual standstill.
Yet, as the report says, an uptick in contracting, together with improving execution, increasing labour availability, and timely release of payments by the government, has meant that stocks of road construction companies are witnessing an early Diwali of sorts.
Stocks on fire
So, which companies are benefiting from this largesse?
Almost all marquee road companies including KNR Constructions, PNC Infratech, IRB Infrastructure Developers and Ashoka Buildcon could be the most significant beneficiaries of this rise in order flow as their strong financials would allow them to corner the biggest pie of the business on offer.
Indeed, shares of IRB and Ashoka Buildcon are up 65-70% over the past year, even after paring the gains in recent weeks. Shares of PNC Infratech have almost doubled to around Rs 300 apiece from less than Rs 150 in October last year. KNR Constructions has done even better, with its shares almost tripling to race past Rs 300 apiece earlier this week before trimming the gains on profit-taking.
Roads all the way
The share of contracts awarded to roads companies as a fraction of the total infrastructure spend in the January to July period was 29.2% as compared to 15.3% in the year ago period.
In fact, the next two segments after roads—manufacturing and railways—come a distant second, with the government having spent Rs 16,000 crore and Rs 11,000 crore on them, respectively. The spends on other key infrastructure sectors like mining, real estate and power equipment were even lower at Rs 8,700 crore, Rs 6,000 crore and Rs 5,000 crore, respectively. Even taken together, these three sectors could not attract as much government money as did roads.
Baba Ramdev’s Patanjali-controlled Ruchi Soya gets nod for Rs 4,300-crore FPO
Ruchi Soya Industries Ltd, the publicly listed edible oil company now controlled by fast-moving consumer goods and wellness products firm Patanjali Ayurveda, has received regulatory approval for a follow-on public offering (FPO).
The proposed FPO, worth Rs 4,300 crore, received the capital markets regulator Securities and Exchange Board of India’s green signal on August 13, a note from SEBI shows.The share sale will help the company move forward on meeting the minimum public listing norms.
Currently, yoga guru Baba Ramdev-led Patanjali and associated firms own a 98.9% stake in Ruchi Soya. Patanjali had acquired a majority stake in the maker of soya food brand Nutrelafor Rs 4,350 crore through an insolvency process in December 2019.The acquisition also brought edible oil labels Mahakosh and Ruchi Gold under Patanjali’s fold.
Patanjali has three years to bring down its holding to 75% or lower, as per regulatory norms. It is likely to first reduce its stake to around 90% in the FPO and will have to dilute or divest a stake in coming years to meet the listing norms.
Since the acquisition Patanjali has been slowly bringing parts of its own business under the listed company besides opening its doors to a multi-brand strategy for the same product offerings.
For instance, during the February-July period last year, it added honey and wheat flour product under the Nutrela brand. In May this year Ruchi Soya acquired the biscuits, rusks and cookies business from Patanjali.In June,
Patanjali transferred its noodles and breakfast cereals business to Ruchi Roya and launched a nutraceuticals unit.
In effect, instead of going for a straight merger to bring all the businesses under the listed arm, Patanjali is selectively moving assets under Ruchi Soya and playing a multi-brand strategy for categories in which it already has a presence.
The stock market had already seen a similar move coming in, leading to a sharp run-up in the price of Ruchi Soya. The company’s shares, which were trading under Rs 4 each before Patanjali’s takeover,are currently hovering around nearly Rs 1,120 each. Ruchi Soya has a market capitalisation of Rs 33,000 crore.
Ruchi Soya intends to use the proceeds from the FPO to repay loans and meet its working capital requirements and other general corporate purposes.
SBI Capital, Axis Capital and ICICI Securities are managers to the issue.
Ruchi Soya’s revenue rose 73% to Rs 5,266 crore for the quarter ended June 30 over the year-ago period, buoyed by higher prices of edible oil. Net profit more than tripled to Rs 181 crore from Rs 49.28 crore a year earlier.
Stock market rally ‘not a blip’: Finance minister Nirmala Sitharaman
Finance minister Nirmala Sitharaman feels there is a definite positive sentiment in the Indian economy and that’s not entirely because of the stupendous stock market rally that has pushed benchmark indexes to record highs.
Sitharaman also believes a “paradigm shift” is happening in the way investors and small savers are looking at their savings in a “completely different way”, as is evident from the gush of money into stock markets.
The comments on a day when the benchmark BSE Sensex climbed above 56,000 for the first time while the Nifty50 breached 16,700. The 30-stockSensex and the Nifty50 have more than doubled from their lows of March 2020 when they had crashed due to worries related to the Covid-19 pandemic.
“I wouldn’t for a minute credit the positivity in the economy purely on the stock markets. There is definitely positivity,” Sitharaman said in an interview with The Economic Times.
Responding to a query whether there wasa disconnect between the stock markets and the real economy, she replied in the negative.
“No, I would say that is a matter of discussion which is going on. But it couldn’t have sustained itself through 2020 Covid and through the second wave [of] Covid and enter into the second half of 2021. So, it’s not a blip is what I feel,” she said.
On inflation and RBI policy
Sitharaman said that the Reserve Bank of India is unlikely to withdraw the excess liquidity in a hurry even though it was concerned about the impact of high fuel prices on inflation.
She said the government has been closely monitoring the prices of several items, including perishable commodities and seasonal products, and that both retail and wholesale inflation numbers have started coming down.
On privatisation and disinvestment
Sitharaman said the government has working to privatise Bharat Petroleum Corp Ltd (BPCL) and national carrier Air India, and hopes to complete the process by the end of the year.
She said that the government has to conduct “far more due diligence” when it divests any assets and that there is a “complete unglamorous backdoor” work. “We are going steadily, but surely,” she said.
The government is also working to privatise two state-run banks, as announced previously, and sell a minority stake in general insurance companies, she said. The planned initial public offering of Life Insurance Corporation is also on course, she said, adding that the government will maintain a minimum in life, general and reinsurance segments.
Responding to a query on whether the government was looking to reduce the Goods and Services Tax (GST) or rationalise the slabs, Sitharaman said there was a need to wait a bit longer.
She said that, purely from the revenue generation point of view, the time may have come to rationalise the slabs and rates. But from the point of view of reviving the economy, it wasn’t the right time, she said.
Sitharaman said the government’s stand on cryptocurrency hasn’t changed. But she admitted that it’s a very big potential area and a lot of global developments are happening.
“We are not saying no to cryptocurrency. We are saying we’ll have to see how this technology can help fintech to maximise the potential that it has,” she said. “But how sophisticated regulation can be is something which I want to work with the Reserve Bank. I can say the work is nearly complete. It is now for the cabinet to go into it.”
Eight years on, Emcure Pharma takes a second shot at IPO
Pune-based Emcure Pharmaceuticals Ltd is making its second attempt to float an initial public offering (IPO), joining a bunch of healthcare companies to tap into the stock market buoyancy.
Emcure has filed a draft prospectus with the capital markets regulator Securities and Exchange Board of India for the IPO that includes both primary and secondary share sales.
While the drugmaker aims to raise Rs 1,100 crore by issuing fresh shares in the IPO, its promoters and investor Bain Capital plan to sell a total of 18.16 million shares. Private equity firm Bain alone will sell almost 10 million shares.
Emcure joins a growing list of healthcare services and pharmaceutical companies to float an IPO. Already, companies such as pathology chain Krsnaa Diagnostics Ltd, hospital operator Krishna Institute of Medical Sciences and drugmakers Windlas Biotech Ltd and Glenmark Life Sciences Ltd have gone public this year.
Emcure’s planned IPO comes eight years after Emcure first approached SEBI for its maiden share sale in July 2013. However, the drugmaker eventually scrapped the proposal.
Emcure makes and sells a wide range of pharmaceutical products across several therapeutic areas. The company claims it is the 12th largest drugmaker in India by revenue and the largest in segments such as gynaecologyand HIV anti virals .The company says it is also developing a Covid-19 vaccine.
Emcure was set up in 1981. It operates 14 manufacturing plants.The company’s consolidated net profit soared to Rs 418.59 crore for the year through March 2021 from Rs 100.61 crore a year earlier. Revenue from operations jumped to Rs 6,056.41 crore from Rs 5,048.55 crore.
Perpetual bonds could be popular again as HDFC Bank mops up $1 bn
HDFC Bank, India’s most valued lender, has shrugged off concerns related to AT1 (additional tier) bonds that arose with the crisis at Yes Bank as it raised $1 billion from overseas investors. India’s biggest private-sector bank raised the amount—thehighest ever by a local lender—by issuing the perpetualbondsata coupon rate of 3.7%, it said on Friday.
HDFC Bank intends to use the money to strengthen its balance sheet as the economy is seeing some signs of revival in credit demand with the severe impact of the Covid-19 pandemic recedingand business activity slowly coming back to its normal course. The bonds are US dollar-denominated, direct, subordinated, unsecured, and Basel III-compliant.The notes are rated Ba3 by Moody’s.
They will be listed on the India International Exchange (IFSC). The bond issue was oversubscribed. This indicates interest of offshore investors in perpetual bonds. The HDFC Bank offering is believed to have seen participation from Singapore sovereign fund GIC and many other marquee investors such as BlackRock, Fidelity, AIG, T Rowe Price, Schroder and Investment Corporation of Dubai.
Why it’s important Investor interest in such securities had taken a knock after the Reserve Bank of India extinguished Yes Bank’sAT1 bonds worth Rs 8,415 crore ($1.15 billion) in March 2020. This happened after the RBI seized Yes Bank in line with terms of a bailout plan. The RBI decision, however, had led to losses for investors in those bonds. This episode led to litigation.
Subsequently, the capital markets regulator Securities and Exchange Board of India came up with new rules for domestic sale of such bonds, effectively closing the window for such issues in India. HDFC Bank’s issue may now prompt other companies to tap the offshore market for similar bonds. State-controlled SBI, the largest lender in the country that had launched the first such overseas perpetual bond issue five years ago, had said two months ago that it was mulling a new AT1 issue. It had said this could be denominated either in dollars or in the local currency.
HDFC Bank’s advances aggregated to about Rs 11,47,500 crore as of June 30, 2021, up 14.4% over the same day a year earlier and rising 1.3% over Rs 11,32,800crore as of March 31, 2021. As per the Basel 2 segment classification, domestic retail loans as of June 30, 2021 grew by around 10.5% over June 30, 2020 and remained at a level similar to that as of March 31, 2021.Domestic wholesale loans grew by around 17% year-on-year and around 2% sequentially.
Among loan categories, retail loans grew around 9% over June 30, 2020 but were down 1% as compared to March 31, 2021.Commercial and rural banking loans grew strong at 25% over a yearago and around 4% over March 31, 2021.Other wholesale loans grew by around 10.5% over June 30, 2020 and 1.5% over March 31, 2021.