What is Nifty@MRP?
As investors, we constantly track the Nifty movements. To make investing more profitable and not a game of mere chance, we need a solution, a solution which could help us identify whether the market is grossly depressed or irrationally exuberant. This is exactly what Nifty @ MRP is for!
Considering that the Nifty stocks are the top traded stocks of the country, we expect them to be traded at their MRPs (fair value). But this may not always be true. Thus, Nifty @ MRP gives an indication of whether the Nifty is fairly valued or whether irrationality is driving the markets.
What is the latest value of Nifty@MRP?
A lot of things have changed in the past six months, since we last sent out our Nifty@MRP report. Modi-led BJP won the elections with a majority; current account deficit has been brought under control; huge FII funds inflow, the economy expanded by 5.7% in the first financial quarter – signalling bottoming out of economy after two years of falling GDP growth!
With the new government better positioned to bring in the much required reforms for the economic growth, the markets saw a long rally post elections. But markets move faster than the economy. However the fundamental are yet to show signs of a turnaround. As a result, our valuations too reflect a cautious optimism.
For June 14, Considering the free float market capitalization at the MRP of individual stocks and the share price data as of 30th September, the Nifty@MRP comes out to be 8003.77. On 30th September, NSE Nifty index closed at 7964.8, which is 0.5% or 39 points below the Nifty@MRP of 8003.77. It indicates that the index is fairly valued.
On similar lines, the Sensex@MRP comes out to 26341. On 30th September, the Sensex closed at 26630.5, which is about 1% or 290 points above Sensex@MRP of 26341.
So were we surprised with this valuation? Well, to be honest we were slightly surprised to see the Nifty fairly valued at 8003! But the valuations of the individuals Nifty companies were done prior to arriving at a value for Nifty@MRP. Each company has been valued separately with rigour. The Nifty@MRP value is merely an outcome of these individual valuations.
The sectors that have majorly contributed to this spurt in the Nifty@MRP value are Banking, Pharma, IT and Auto. The turnaround in banking sector was expected as in Dec 2013, the economy was still in doldrums and the threat of NPAs loomed large. With economy expected to grow and banks taking decisive steps towards curbing NPAs, our valuations too have started to reflect the growth potential in the sector.Recovery in industrial sector is expected to give a boost to Auto, while the US recovery will support growth in the IT sector. Our close analysis of data in the Pharma sector suggests huge growth potential in a few companies, which has been thereby reflected in our valuation.
Analysis of the June 14 Quarter financial performance of the Nifty 50 companies
While on a yearly basis, the companies seemed to have performed well, we can still see a degrowth on a Q-o-Q basis. In fact, Net profits continue to decline for a third consecutive quarter. Sectors like FMCG, Pharma, IT, Banks and Auto have shown good performance in this quarter. While sectors like Cement, Metals, Energy and Capital Goods have not yet shown signs of improvement.
With respect to financial performance leaders include Dr. Reddys Laboratories, HCL Technologies, Asian Paints, ITC, HUL, Bank of Baroda, Lupin, PNB, Tata motors Ltd. While the list of laggards includes companies like ACC, BHEL, Cairn India Ltd., DLF, GAIL, NTPC, Sesa Sterlite, Tata Steel. The quarterly results of all nifty companies except ONGC, BPCL and Tata Motors were in line with our expectations.
Overall, Q1FY14 results show the continued weakness in the economy, with declaration in Net Sales, weak pricing power and high interest costs reflecting in the profit degrowth. With RBI seemingly on a path to continue high interest rates this may lead to a further deterioration in companies with stressed balance sheet. However with China slowing down and US crude output increasing, we expect India to be a key beneficiary of falling global commodity prices. We believe this would aid the recovery in the Indian economy even though it would be a slow and gradual process as India kick starts its asset creation program.
Over all, out of 50 Nifty companies, around 18 companies are trading below their MRP (Under-valued), 8 Companies are trading close to their MRP i.e. are fairly valued while 24 companies are trading above their MRP (Over-valued).
Slowdown in global demand, sluggish economic activity domestically, high inflation and interest rates have led to a sub 5% GDP growth in the last two years. This is expected to change as the new government, has initiated the reforms process to attract investment and remove infrastructure bottlenecks that will boost growth. Unclogging of policy logjam will lead to rise in the domestic investment and consumption which will further give a boost to growth. Sectors like Auto, consumer durables will gain from this revival. Also, services sector which contributes 60% to real GDP, is expected to grow on the back of acceleration in trade, transport, and banking.
However, this growth comes with a caveat, with both the government and central bank required to play their roles well. The growth forecasts assume that reforms are undertaken to ease supply-side constraints (particularly in energy and infrastructure) and to improve labour productivity, fiscal policy tightening continues, and a credible monetary policy stance is maintained.
Also, on a global economic front, things remain sketchy. The U.S. fed has signalled towards high interest rates and we think this may happen earlier than the markets expect. In fact, foreign markets have already started factoring in an interest rate of 3% as soon as Q1 FY16. Eurozone too continues to send warning signals. The Eurozone manufacturing PMI fell to a 14-month low of 50.5 in September 14. In fact manufacturing PMI of Germany, one of the best performing economies of the Eurozone, has declined to 49.9 in Sept 14 signalling contraction. China too continues on its troubled path. Though the Chinese GDP has grown energy consumption has remained stagnant which forces us to remain circumspect about the Chinese data numbers.
On the valuation front, markets seem to have factored in all the domestic positives after the long run witnessed post elections. Though our recent experience suggests, that attractive investment opportunities can be found in unconventional places. We would therefore urge investors to look hard at finding value buys in this market. The correction seen in the past 2-3 days if continued will only open up more doors for the value investor. Remember, to buy fundamentally strong companies at a sufficient margin of safety!