February 8, 2006
It’s difficult to miss that the sensex is at 10K. Frankly, I personally think that 10K is no different than 9900 (ofcourse it is 1% higher). Fundamentally nothing much has changed when the sensex rose from 9500+ to 10K. But at the same time with the index at these levels, I updated my worksheets and generated the graphs above. What does the data tell (and everyone will have their own interpretation)
- ROE is 20% +, highest in the last 15 years. This clearly shows that the cost cutting and restructuring that indian companies went through, has paid off.
- Earnings which were roughly flat between 1997 and 2003, have exploded since then. The reason is not diffcult to see. Good economic growth, higher efficiency due to the restructuring, low interest rates etc etc.
- P/E ratios do not appear very high, but have to be seen with reference to the ROE which is above the past averages and the earnings growth has been very high.
So does the data give me an insight into what is likely to happen in the future?
ROE appears high and may come down a bit in the future to the average levels. But on the other variables like PE (which is dependent on market psychology) and earnings I frankly don’t have any special insight. My guess is as good as anyone else’s. For now, I am not doing much in terms of buying or selling.
But the price levels on some of the individual securities which I own, are now in the ‘alert’ range. What I mean by alert is that once the price crosses my upper estimate of intrinsic value, I relook at the scrip and start selling slowly (around 5% for every 2-3 % price increase). Why 5 % for every 2-3% increase. Nothing scientific or smart about it. I have developed this approach so that if the price keeps increasing I am able to sell at a higher average price and don’t feel regret of losing out on the gain. Conversely if the price starts dropping, then I end up doing nothing (as the scrip is now below my estimate of intrinsic value).
Posted by Rohit Chauhan Labels: Market analysis