Investment Shastra

Sensex inches closer to Sensex@MRP. So, what should you do?

The Indian Stock markets have shown a good performance in 2012, on the back of positive developments around the world and the Indian economy. The Sensex saw a rally that lasted from mid-December right upto mid-February.

This rally came to a halt when the Sensex witnessed a steep correction from 22nd February and saw a further correction post the state elections in March. The Union budget scheduled at the end of this week, is another major event to watch out for.

With the overhang of these concerns, let’s look at the 9 month performance of the Sensex companies. And what is the future outlook? Also, let’s find out what picture does the Sensex at MRP show.

What is Sensex@MRP?

As investors, we are used to seeing the Sensex move every minute. And to make investing more profitable and not a game of mere chance we need a solution. A solution which could help us ascertain whether the market is over-reacting or under-reacting, whether it is grossly depressed or irrationally exuberant; so that you can decide whether you should BUY stocks or SELL them off. This is exactly what Sensex@MRP is!

Considering that the Sensex stocks are the top traded stocks of the country, we can expect them to be traded at their MRPs. In reality, the stocks are driven by their earnings over the long term. The MRP at MoneyWorks4me is based on the long-term earnings capacity of the company. Thus Sensex@MRP gives an indication of whether the Sensex is fairly valued or whether irrationality is driving the markets

Check our earlier reports on Sensex@MRP to learn more about this unique concept.

What is the latest Sensex@MRP value?

Considering the free float market capitalization at the MRP of individual stocks and considering the share price data as of 5th March, the Sensex@MRP comes out to 19,434. On 5th March 2012, BSE Sensex index closed at 17,362.87, which is 10.66% or 2071 points below the Sensex@MRP of 19,434. It indicates that the index is still undervalued at this point of time despite 15-20% rally in Sensex over the last 2 months.

Analysis of 9 month financial performance of Sensex companies

Net sales & net profit analysis: The cumulative net sales of the Sensex companies have gone up by ~25% while the cumulative net profits have only increased by ~12.58% for the 9 month period as compared to the same period last year. The profitability has suffered owing to the high raw material and interest costs seen over the last year. Out of 30 companies, around 25 companies have posted more than 15% sales growth while only 15 companies have posted profit growth of more than 15%. Automobile, Oil & Gas, and Telecom sectors underperformed in the index while Banks, IT, FMCG, Pharma outperformed in the index.

Leaders & Laggards: Infosys, Hero MotoCorp, TCS, ITC outperformed with respect to the financial performance while Bharti Airtel, Maruti Suzuki, Reliance Industries, SBI were the underperformers.

Future Outlook:

On the global front, the European governments have approved a second £110 billion bailout for Greece to prevent the collapse of the European economy. As a result, markets have seen an improvement in the investor sentiment over the last 2 months. This is also reflected in the fact that Foreign Institutional Investors (FII) have invested more than Rs. 38,000 Cr. over this period in the Indian market. While this has provided some cheer over the short term, a long-term solution to avert the crisis is still not visible and could continue to remain an overhang for the market.

On the domestic front, the next big event to watch out for is the annual budget which will be presented in the parliament on 16th March. The market is expecting big ticket reforms from the budget to bring the domestic economy on the growth path while keeping inflation under control. If the budget lives up to the expectations, the domestic economic condition is expected to improve and this could drive the market upwards. Having said this, the increasing fiscal deficit will remain the biggest concern and it remains to be seen what the Government will do to bring this under control.  An increase in corporate taxes and excise duties could be in the offing for the next financial year.

After a dismal performance in the UP elections, it remains to be seen whether the Congress, shrugs off this performance, and pushes for reforms to improve its image and performance before the 2014 Lok Sabha elections; or continues with its inability to take decisions and push for reforms.

While these will be the major things to watch out for, the March quarter could see Indian companies post better results owing to stable raw material prices and expected interest rate cuts by RBI.

Looking at the numbers, Sensex is quoting around 10% discount to Sensex@MRP. The major trigger now will be the budget which will provide an indication of what stance the Government takes – reformist or populist.

While the Sensex has witnessed an increase over the last 2 months, we expect the Sensex to be volatile owing to these reasons. While some sectors have become overvalued over the past 2 months, sectors which have suffered such as Oil and Gas, Metals, Capital Goods due to a variety of problems still offer some attractive opportunities.

Considering the situation, investors would be best advised to:

Be cautious. Safe and attractive investment opportunities are few.

Remember it’s better to buy fundamentally strong large or mid cap companies at a sufficient margin of safety.

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A team of business leaders, equity research analysts & investment counsellors. Started in 2008; experienced in equity research, financial planning and portfolio management. Passionate about providing institutional quality research and advice to Retail Investors in a simple easy-to-understand-and-act manner.