Investment Shastra

Is the Sensex fairly valued? Here’s the verdict

One of the most favourite questions among stock investors is : Is the Sensex fairly valued? Be it retail investors, analysts, FIIs, Corporates or the Government, the answer to this question has implications for all parties concerned. Afterall the Sensex will go up if there are more buyers and go down if there are more sellers. So, if most people feel that Sensex is over valued, there are higher chances of a correction happening. With this in mind, we decided to understand what our readers thought about the current levels of Sensex. A couple of weeks back we put up a poll on our blog Stock Shastra.

With Sensex hovering around 18000, in your opinion Sensex is

a) Fairly Valued            b) Overvalued            c) Undervalued

The response that we got, itself indicated the popularity of the question. So, what is the general verdict? What do people feel about the current levels of Sensex? As shown in the chart below, 60% of the voters feel that the Sensex is fairly valued at the current levels. The next are 29% voters who feel that the Sensex is currently over valued whereas only 11% are of the opinion that Sensex is undervalued. So, there you go. The general verdict seems to be that the Sensex is faily valued!

But is there a way to be sure of this? Is the Sensex actually fairly valued. A recent paper, ‘Indian Equity Markets: Measures of Fundamental Value’ published by Rajnish Mehra in University of California has also concluded that Indian stock valuations are in line with the corporate fundamentals. The author has used a quantitative model to predict what fundamental values in the Indian market should be. According to this paper, the current value of the Stock market is close to its fundamental value. However, there is also a possibility of an upside, if the economy continues to grow.  You can read more on this paper here.

So, what is our take on the situation?

Sensex@MRP, our tool which gives the intrinsic value for the Sensex, also points in the same direction. (Read our blog for more on Sensex@MRP) Considering the intrinsic values of the 30 Sensex companies, Sensex@MRP comes out to 18,996. At the current level of 18,000 the Sensex is trading just 6% below its intrinsic value. Thus, we too feel that at the current levels, Sensex is more or less fairly valued.

Going by this evidence, now is the time to be cautious. As the Sensex is close to its fair value, finding value picks at the current moment is difficult. Infact you should be on the lookout to sell a few of your holdings which have given you good returns and which currently appear to be above their intrinsic values. To find out the intrinsic values of your stocks log on to MoneyWorks4me.com.

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  • @sanjaysoni_k9 Hi. You're right. It can be in Fixed Income products. For simplicity sake assumed just 12% return and booked annually.
  • @hemanthd1981 Hi. Thanks. I thought of simplifying. Hence avoided brokerage/tax/asset class.