What is the fair value of the Sensex 9000, 12000? At what P/E 12, 15, 23? Opinions, theory, lets discuss.

Balaji

Dear Balaji,

In my opinion any value of the sensex can be c onsidered aas fair . As long s the rise and fall is gracious and accompanied by a reason.
If corporates begin to declare high flying dividends, bonuses and show big expansion plans, it gives rise to an inflated euphoria. In avice versa scenario, if the company faces competition or does not meet its targetted sal;es, people feel its a sinking ship. All becuase of little or no knowledge of reading the reports in the right context.

The government also has a major role to play in the subject. Conflicting policy decisions make way for only speculators and not investors.

Parag Merchant

Frankly, the sensex P/E isn't "fair value" - because the sensex has no underlying value. It is a coalesced value of the companies it comprises.That means the sensex has no "earnings" and therefore, no P/E to talk of. What we really talk about is the P/E of the companies.

We need to analyse the companies themselves, and individually. I guess we're all retail investors here - i.e. we like to dabble in investments once in a while and are willing to wait to watch them grow. I also assume you don't mind keeping the money in for upto five years, as long as the returns are good.

So, don't bother about the sensex - that is for traders and mutual funds and such. You must concentrate on individual stocks - these are either cheap or costly now.

I would consider:
1) Dividends: This is extra cash that flows to you every year. Hero Honda, for instance, has consistently given high dividends, and if you invested Rs. 1 lakh in it in 2000, you would have Rs. 50,000 per year as dividend today!

But not all companies give big dividends. Typically, dividend yields should be greater than 3% of the stock value for it to be of any significance. When companies issue dividends they will say "40%" or "50%" or such - but that is on the FACE value of the share, which for most companies is less than or equal to Rs. 10. HeroHonda for isntance has declared a 1000% dividend - but a face value of Rs. 2 means you will get Rs. 20 per share. (at a price today of Rs. 700 per share)

2) Price/Earnings : P/E ratio is the most often quoted valuation of a company, also called "earnings multiple". Typically, P/E of a stock should be equal to it's earnings growth. So if Infosys says it will grow at 30% per year, you would expect that its P/E is 30. They have predicted an EPS of Rs. 125 in 2006/-7, and at a forward p/e of 30 that means a "fair" price is Rs. 3750. They are at Rs. 3400 today, so Infy is cheaper than it's fair value.

3) Price/Book Value: For highly capitalised industries, like Steel, Oil or Banking stocks, the Price to book value is important because it gives you an idea of how leveraged the stock price is in comparison with the assets of the company. That, joined with the company's debt equity ratio, gives you an indication about the company's true value.

Note that IT companies shouldn't be judged on this ratio- they have low capital and debt. They are employee intensive service industries so they can be judged by profit per employee and marginal costs per employee.

I would choose a company with a low P/E which is at least 25% below its earnings growth predictions, has lower P/e and P/BV than its peers in the industry. I'd recommend a high dividend yield where growth is not looking very strong (like cement sector and fertilizer)

Another thing to think about is the constitution - Sensex leans heavily on reliance and ONGC - the NIFTY is a more balanced and better indicator. But it is only an indicator of the economy at large - when the Nifty P/E is at a low, you should invest in diversified mutual funds!

Deepak... regarding
Frankly, the sensex P/E isn't "fair value" - because the sensex has no underlying value. It is a coalesced value of the companies it comprises. That means the sensex has no "earnings" and therefore, no P/E to talk of. What we really talk about is the P/E of the companies.

What if we take the Sensex as a conglomerate -- with each company as a unit... then we have growth for the sensex as a whole, earnings for the sensex as a whole, dividends for the senses as a whole... so I guess it is possible to arrive at a fair value of the sensex... if we can arrive at the fair value.

Also if the sensex represents is a barometer for the stock market it should be _link_ed to the earnings of it therefore how do we say if it is overheated or underrated?

Balaji

Can Sensex have a fair value _base_d on the indian industry performance ? I dont think so.
At any given moment in the history of Indian Stock Market, Sensex only indicated "Emotional Quotient" of the people participating in the stock market. Sensex at any time is just an indication of the "Emotional Status" of the people involved. That is one of the reasons "
If at all the central government falls in September" Sensex will nosedive immediately.
If at all Al Qaida attacks Pentagon in September" Sensex will nosedive immediately.

The whole of Stocks and Stock Market depends on simple mechanism of "DEMAND" and "SUPPLY" of Stocks. If you take sensex value in the last 5 years in 2001 it touched 2600 levels and. Even in the first quarter of 2003 Sensex is around 3000 levels.

So if we _object_ively question, from 2003 to 2006 does our industry quadrupled so that today 12000 levels are justified.
The only difference is from 2001 to 2006 the supply of stocks has increased but the demand has increased tremondously. In 2001 no one wants to enter into the stock market and no one wants to buy stocks. The decision by the masses not to enter into stock market was not taken _object_ively but the decision was taken emotionally. Similarly the same stocks which have not changed majorly from 2001 to 2006 are enjoying greater valuations today because the herd mentality masses are entering the stock market bigtime. And suddenly if a disaster strucks us and the emotions of the masses change, Sensex might as well seek levels which are less than 2600.

My own experiencein 2003, i bought some stocks for which there were no takers at all, They are sub 10 rupee stocks. One such stock is JBM Tools. Another stock which i picked up after September 2001 is Zicom Securities between Rs 15 to Rs 21. Today both the stocks are in Rs 100 category. Both the companies have more or less same levels of growth rates or little higher growth rates. But they are not definetely 10 time or 5 times the growth rates of 2001. But the only difference is "DEMAND" has increased significantly.

So SENSEX is a game of DEMAND and SUPPLY of Stocks.
SUPPLY of stocks depends on the industry growth and other micro and macro economic trends.
But DEMAND is completely driven by the EMOTIONS of the masses participating in the market.
If "SIGNIFICANT PORTION OF THE MASSES" take their decisions of participating in the stock market _base_d on the micro and macro economic trends and industry trends we can see a FAIR VALUE for SENSEX.

But it is completely ruled out. People can also say that major portion is controlled by FIIs and Mutual Funds - even there the funds are raised from the masses and high networth individuals. So even those individuals subscribing for MF are very less during 2001 and 2003.

So in any case SENSEX is an indication of the "EMOTIONAL QUOTIENT" of the masses and not the performance index of the industry.

Lanka