Indian Stock Market – Are We In a Bull Market?

Indian Stock Market, bull market

The recent positive move in stock and the indices (Nifty and Sensex) has caught many people off-guard. Despite the economic challenges such as fiscal deficit, lower GDP growth and other issues, the Indian Stock Market seems to give more value to the positive aspects such as reforms in FDI, banking and other sectors.

There seems to be a liquidity driven rally with foreign funds pouring in to Indian equities to tap India’s growth story. Nifty breached its all-time high of 6,100 and it’s the third time that Nifty is above 6.000 levels, and the million dollar question about the Indian Stock Market is “whether this is a bull market or a bubble in the making?”

Past Market Performance

Although the past cannot fully predict the future, it can provide some data to understand where we stand and where we could go. Le’ts look at the 10-year nifty chart here which shows that we did see a secular bull market from the year 2005 to 2008, later followed by a steep fall in late 2008 and 2009.

In other words, a bubble was in the making in 2007 and 2008, where the Indian stock market was ahead of its time. The index ran up too fast, but companies’ earnings were not growing as fast. The early 2008 was at the peak of the bull market, which resulted in a bubble, which burst in a few months in late 2008.

Nifty 10-year Chart (27 Jan 2003 to 27 Jan 2013)

Indian Stock Market - Nifty 10-year chart

Earnings vs. Index Levels

Index is driven by stock prices, while earnings are driven by actual financial performance. If we look at the earnings in late 2008 period the earnings were close to Rs.235 levels with a PE of 16-18x. There was pessimism all around and people expected worsening economic and market situation.

And they were right as in late 2008 and early 2009 the Nifty was at a Price to Earnings multiple of less than 15 times. This was the worst time with poor earnings, which were declining for 2-3 quarters. However, in hindsight, this was also one of the best times to buy strong blue chips at bargain prices.

Indian Stock Market - Nifty EPS

You can see this period marked by the red ring in the Nifty EPS chart below. However, in FY 2012 the earnings per share has crossed the Rs.300 mark and in 2013 it is expected to head close to Rs.320 levels, which will also justify the rise in the Nifty.

Chart Source:

Opportunity with a Massive Challenge

There was an opportunity to cash-in on the low prices, however, the earnings or EPS growth was too low and several companies were reporting losses. It was shocking to see earnings declining, which is clearly evident from the declining earnings growth in the chart below.

Indian Stock Market - Nifty P/E versus EPS Growth

If you see the period that falls under the Orange ring, it shows a bottom or base being formed. This period has all the bad news you can think of – poor earnings, poor sentiment, high interest rates, lack of investments, etc. Lack of expansion, growth and investments further lead to postponement or cancellation of new projects as corporates became pessimistic too. It took more than a year for the market to come out of this phase.

Chart Source:

Late 2008 was a good time to buy or invest in terms of PE (less than 15) but the next few months of negative earnings made things worse, until some recovery was seen in early 2010, as the business cycle and economic fundamentals improved.

Are we at the peak/over valuation or do we have some more upside left?

The current situation seems tricky because of a mix of contrarian factors – slow economic growth, some reforms, high foreign fund flows, good earnings among blue chips, etc. A study by for the 11-year period Jan 1999 to Jan 2010 shows some interesting ball-park numbers to answer this million dollar question.

Indian Stock Market

We are slightly below High Valuations – Some upside still left

A closer reading of the first column (P/E Ratio) tells us about where the market stands. If we know the current PE, PB and Dividend Yield we can judge where the market stands.

As of Jan 25, 2013 the Nifty’s data is below:-

Indian Stock Market - Nifty PE, PB & Div Yield Values

Lets look at the PE number, which is updated frequently and reliable. At 18.8x PE we are above the long term average of 17.87, but still below the High Valuation range of 21-23. We are close to high valuations but not there yet.

To put it in a nutshell we are in a bull market (or a bull phase) but we are not in a bubble as in year 2008, however we are close to high valuations, so investor must take small cautious steps to ensure he/she has not bought stocks at the peak levels.

Nifty has touched the 6k levels twice in the past, but this time the earnings and earnings growth (Expected FY 13 EPS of Rs.320) of companies are much higher and stable.

The growth in earnings has brought down the PE ratio below 20, which is reasonable in India’s context. The future of the Indian Stock Market is going to be decided by the implementation of reforms, budget announcements, upcoming elections and other factors.

Indian Stock Market – What Next?

Going forward, if the index remains at the same levels and earnings growth is strong, then the market may become stable and attractive. However, as we are at all time highs of 6,100 there is always a fear of a fall or a correction due to profit booking by FIIs or other large investors.

Moreover, unlike the year 2008 some investors are waiting and watching rather than rushing to buy make a quick gain.

Based on the above findings it is clear that the long-term potential is positive provided you are backing solid names with a strong business and balance sheets.

Indian Stock Market is unpredictable, so it’s a good idea to wait for small corrections or dips to buy stocks so that your downside is protected. Although its practically difficult to pick peaks and bottoms of the index, you can definitely invest in the best blue chips to create long-term wealth.


About the Author

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management.

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