Thursday, August 28, 2014

SENSEX Valuation expensive on FY-16 EPS

Indian Stock Market has delivered exceptional return since the start of the calendar 2014 and rightly so based on expected lines. We got historical political mandate in May 2014 and the global liquidity situation has been very benign since then. But without proper consolidation and time correction (if not price correction) market is increasingly getting vulnerable for sudden sharp knocks.

Valuation is no longer attractive and good quality companies are trading at historically high valuation. Like I have always said, Market is a pendulum which keeps swinging back and forth between the state of overvaluation & undervaluation and never stay at fair valuation (center) for long. Right now markets are stretching towards the overvaluation. The more it stretches in that direction, sharper will be the retrenchment.

On valuation front, SENSEX, which comprises top 30 listed companies in India, is expected to deliver an EPS of 1560 for FY-15 and 1850 for FY-16. At SENSEX level of 26600 the index is broadly trading at 17 times FY-15 EPS and 14.5 times FY-16 EPS which gives an earnings yield of 5.9% and 6.9% for FY-15 and FY-16 respectively. With bond yields in India at 8.5% it makes sense to book profits in overvalued stocks and put money into bonds for sometimes till earnings yield appear greater than or equal to bond yields.

Also technically the index appears highly overbought on RSI and stochastic indicators on Monthly charts as shown in the image above. A price and time correction appears inevitable and would be healthy for the market in general.

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