Good artice on P/E ratio

The short-term outlook

Liquidity, demand-supply scenario, political uncertainties, budget, corporate announcements etc are some of the factors, which affect the price of a stock in the short-term.

Suppose there is good news flow for the steel industry. Then practically all the steel stock prices will move up even though some of these companies may not be performing too well.
Therefore, buying and selling in the short-term is more of a trading call than an investment call. It is suited more for a person who can invest his time daily to the stock market.

The long-term outlook

The real benefit of investing in equity markets accrues through long-term investing.
Hence it is more pertinent to understand the stock valuation from a long-term perspective.

In the long run, the price of a stock is the reflection of the operational performance of the company. The expected growth and future profits will determine the price. And because we have to take a view on the future prospects of the company, the industry and the economy in general, assessment of the 'right price' becomes difficult, subjective and prone to large volatility depending on how the future unfolds.

The Price/Earning ratio or the PE ratio is the term commonly used to assess the fairness of the stock price.

PE ratio is defined as the ratio of market price to earning per share (EPS).

PE ratio = Market price of the share /Earning per share (EPS)

EPS in turn = Profit After Tax (PAT) / Number of shares in the share capital

The common sense would dictate that lower P/E ratio means that the price is undervalued and higher P/E ratio means that the price is overvalued. Unfortunately, life is not so simple. If it were so, you would not be reading this article. You would be sitting on the stock market and minting money by buying low P/E ratio stocks and selling high P/E ratio stocks.

In absolute terms there is no 'right' PE. One cannot say that PE of a stock of say 10 or 15 is good or bad.One can only make sense of a P/E number of a particular stock bycomparing it with P/E of other companies in the same line of business comparing it with the benchmark indices say Sensex P/E or Mid-cap P/E assessing the growth potential of the industry assessing the growth potential of the particular company

Let's look at a couple of cases - Banking & IT - to get a better appreciation of the P/E number. Banking as an industry enjoys an average P/E of around 8-10, vis-�-vis IT, which enjoys PE exceeding 25-30. The reason is simple - growth.

In a normal scenario the profits of a bank are the spread it earns between the interest rates on deposits and lending. And this usually varies between 2-4 per cent.

If the interest rates on deposit go up, the lending rates will also go up and vice versa. Therefore, the profit potential of a bank is limited. And hence the P/E ratio for banks is usually below 10. The only option for a bank to grow is by increasing the asset size.

Banks like HDFC and ICICI are rapidly increasing their asset base every year vis-�-vis the nationalised banks. Hence, they enjoy much higher P/Es of 20-25.

On the contrary most IT companies are growing at 30-40 per cent p.a. Therefore, in anticipation or likelihood of such high growth rates, the P/E ratios of 25-30 are not unreasonable even for average IT companies. The larger and better companies may even enjoy P/E in excess of 30-35.
Therefore, one should keep in mind that:
There no concept of an absolute right PE
It is quite normal to invest in a high growth industry like IT with P/E of say 20, but not so for a low growth industry like bank
A low P/E vis-�-vis the industry average (e.g. Bank A is quoting at 3 PE as compared to the average of 8 PE for the banks) does not necessarily mean it is cheap. The PE may be low because the bank is having some problems and hence may not be expected to do well in the future.The P/E number requires careful analysis. Only then can one assess the over or under-valuation of a stock and decide on the investment worthiness of the stock.

author is executive director, Infra Solutions (India) Pvt. Ltd.

New NFO's and news

AIG Infrastructure and Economic Reforms Fund — A diversified theme

The fund: AIG Infrastructure and Economic Reforms Fund is an open-ended equity fund that aims to invest in companies that are likely to benefit from the above-mentioned issues. This includes sectors such as cement, metals and capital goods. Identification of economic reforms early on and the opportunities they would create for such sectors as banking or financial services, retail and investment is also one of the fund’s objectives.

Risk profile: Given the above investment strategy, the fund’s universe appears more diversified than regular theme funds and may therefore carry lower risks than concentrated sector funds. Nevertheless, the fund would call for more active entry and exit strategies by an investor than warranted by diversified equity funds. The fund could at best be a diversification option for the portfolio.

Pros and cons: A good number of existing funds with an infrastructure/capital goods theme do have a broad based investment universe in their mandate. For instance, Tata Infrastructure has substantial exposure to metals and financial services. There are also funds that seek to capitalise on opportunities that arise from capex spending.

AIG Infrastructure’s key distinguishing feature may be its plan to identify companies that have ‘multi-year opportunities’ that would outlast the primary infrastructure development. These companies may participate in infrastructure building but later branch out to complementary areas once the primary infrastructure needs are met.

However, given the plethora (over 15) of funds with a broadly similar theme now available in the market, AIG may at best be one more option in the space for now. Funds that entered at an early stage of the infrastructure spending by the Government have been the ones that have delivered the best performance. The fund house also has a limited track record in India, managing one diversified equity fund, AIG India Equity launched in May 2007.

Details: The offer closes on January 31. Mr Tushar Pradhan is the manager.

Source :Hindu

Fund Name : Reliance Natural Resources Fund from ADAG Reliance Mutual fund(Reliance Capital Asset Management Ltd.)

Issue Open 01-Jan-2008 and Closes on 30-Jan-2008

Scheme ObjectiveReliance Natural Resources Fund is an open-ended equity scheme.

To invest and generate capital appreciation & provide long-term growth opportunities by investing in companies principally engaged in the discovery, development, production, or distribution of natural resources .

Fund Class Equity Diversified/Open-EndedInvestment plan GrowthFund Manager Ashwani KumarEntry Load 2.25 %/Exit Load 0.00 %

SBI Mutual Fund has launched SBI Tax Advantage Fund - Series I, a 10-year close ended Equity Linked Savings Scheme.

The scheme opens for subscription on Dec. 03, 2007 and closes on Mar. 03, 2008.

The units of the scheme will be available at Rs 10 per unit during the New Fund Offer period.

ObjectiveSBI Tax Advantage Fund - Series I aims at generating capital appreciation over a period of ten years by investing predominantly in equities of companies across large, mid and small market capitalization, along with income tax benefit.

The scheme does not offer facility of Systematic Investment Plan and Systematic Withdrawal Plan.

The scheme aims at raising a minimum of Rs 30 million during the New Fund Offer Period.

Investment made in the scheme will qualify for a deduction from Gross Total Income upto Rs 100,000 (along with other prescribed investments) under section 80 C of the Income Tax Act, 1961.

Asset AllocationThe scheme aims at investing 80% to 100% in equity and equity linked instruments and 0% to 20% in debt and money market instruments.

Load StructureAs it is a close-ended scheme there will not be any entry load further the scheme will also not charge any exit load.Investment Strategy

The investment strategy of the fund will be to invest in equities of companies, which will be highly tilted towards midcap companies that have the potential to grow at a reasonable rate in the long term.

.Performance and ManagementThe performance of the scheme will be measured against BSE 100 and the fund manager is Ritesh Sheth.

Sorce :IRIS


JM Financial MF launches JM Core 11 Fund-Series I

JM Financial Mutual Fund launched JM Core 11 Fund-Series I. It is a three-year close-ended equity oriented growth scheme with multiple series launched thereafter at such periods as may be decided by the AMC. The investment objective of the fund is to provide long-term growth by investing predominantly in a concentrated portfolio of equity and equity related instruments of companies. The fund will invest 65%-100% in equity and equity related securities with medium to high-risk profile. The fund will invest 0%-35% in money market and debt instruments including securitised debt. Securitised debt will not include foreign securitized debt. Exposure to derivatives would be capped at 50% of equity portfolio of the scheme.

Article on sensex for FY 08 - says 32K - Economice Times (7/1/08)

32K!!!
Our attempt to find the Sensex’s targets for 2008 by using the Fibonacci ratios threw up some mind-blowing numbers…
shakti shankar patra
THE CURRENT bull run on the Indian bourses has surprised even the most optimistic analysts and has made a mockery of all predicted targets. Although the market has seen substantial valuebased corrections — the one after the NDA debacle in May ’04, the commodity-led correction in May-June ’06 and last year’s subprime related correction — it has consistently managed to shrug off these setbacks and bounce back to make newer highs. It has also made a fool out of all those who have used these corrections to write a bull obituary. So, as the bull market enters its fifth year, we set out on the arduous task of finding out the possible targets for the Sensex in ’08. In the process, we stumbled upon a certain method of technical analysis based on Fibonacci ratios, which have seen considerable success in finding the annual targets of the Sensex in the past. To put the method in place, we considered the Sensex’s monthly charts in a calendar year. We then subtracted the lowest monthly closing from the highest monthly closing, taking into account the Sensex levels at the end of each month. This difference gave us the range for that particular year. We then multiplied this range with the Fibonacci ratios of 0.382, 0.618, 1 and 1.618 to get various multiples. Then these multiples were added to the tops and subtracted from the bottoms of that particular year to give us the targets and supports for the next year. For example, the highest and lowest monthly closes for the Sensex in ’04 were 6602.69 in December and 4759.62 in May, giving us a range of 1843.07. This value of 1843.07 multiplied to the Fibonacci ratio of 1.682 gives us 2982.08. And 2982.08 added to the highest monthly close of ’04, i.e. 6602.69 gives us 9584.77, which is strikingly close to the top we saw in ’05, i.e. 9442.98. LOOKING AHEAD As we can see from the table below, at least one among these Fibonacci ratios has given us a target that is in a range of +/- 5% of the final realised value of the Sensex. Taking this calculation forward, the highest monthly close of the Sensex in ’07 was 20286.99 in December. Similarly, the lowest monthly closing value was 12938.09 in February, giving us a range of 7348.9. If we multiply this range to the various Fibonacci ratios like 0.382, 0.618,1 and 1.618, the corresponding multiples are 2807.28, 4541.62, 7348.9 and 11890.52 respectively. So, in order to find the Sensex targets for ’08, we added these multiples to the highest monthly closing of the Sensex in ’07, i.e. 20286.99. So, the possible targets of the Sensex in the year ’08 at 0.382, 0.618, 1 and 1.618 Fibonacci ratios are 23094.27, 24828.61, 27635.89 and hold your breath, 32177.51, respectively. SHOW ME THE BRAKES However, as the market keeps heading northwards, the margin of safety keeps getting smaller for an investor. This further enhances the importance of an appropriate stop loss. In order to find that for the Sensex, we looked into various technical indicators, besides the ones based on the abovementioned Fibonacci ratios. The stop-loss level for the Sensex will vary from trader to trader based on his/her trading horizon. For a very short-term trader, the stop loss will be the rising trend line joining the bottoms made on October 22, November 22 and December 19. This value is roughly around the 19400 mark at close on December 31. On the other hand, a long-term investor can use the simple 200-day moving average (DMA) as a stop-loss level, which at close on December 31, was at 15995. Just how important this 200 DMA is for the overall continuation of the bull market can be gauged from the fact that after languishing below the 200 DMA for a long time, the Sensex moved above it in May-June ’03, signalling the beginning of the bull market. In the subsequent years, this 200 DMA has provided the market stunning support and has been broken only twice — during the NDA debacle in May ’04 and the commodity-led crash of May ’06. However, on both these occasions, the market has managed to bounce back above it to signal the continuation of the bull market. Moreover, the Sensex has got support and bounced back from the 200 DMA on many other occasions, including during the recent subprime-related crash. So, a decisive close below it, in all probabilities, will signal the end of the bull market. However, for a more optimistic investor, the final level to watch out for is the lowest monthly close in ’07 — 12938.09 in February. A close below this will mean that the Sensex will have made a lower low for the first time since the beginning of the current bull run, signalling its end. Another point to consider is that post the April ’92 peak of around 4500, the Sensex spent 11 long and painful years in a consolidation mode with several bottoms around the 3000 mark. Although it tried to break out of this range and even managed to make a new high in late 1999, early ’00, this break-out proved out to be a false one and it once again slid to make three more bottoms around the 3000 mark. The real break-out came in June ’03 when the Sensex said a final good bye to the 3000 mark and set out for the sky. A break-out from an 11-12 year consolidation is generally seen as a very powerful break-out and the ensuing uptrend can last for many years, if not decades. Moreover, the fact that the Sensex has continuously made higher tops and higher bottoms suggests that the bull run is strongly in place.