Friday, March 19, 2010

A Comment on The S&P Nifty Valuations.

 What does the common sense analysis say...?

The S&P Nifty index consists of fifty big companies from various industries. An index like the Nifty can also be analyzed just like a company on the basis of it's fundamentals. Since the prediction of the index fundamentals  are beyond the scope of this blog, let's stick with the published historical data available from the NSE website on a daily basis.

( May be this is like trying to drive a car by looking on the rear view mirror..! ). 

Today, S&P Nifty closed at 5250 and the historical Price Earnings Ratio ( PER ), Price to Book Value Ratio ( PBV ) and the Dividend Yield Ratio ( DV ) are at 22.32, 3.69 and 0.94 respectively. These ratios were at 23.59, 3.72 and 0.93 respectively on the 6th of January 2010 when the Index touched the post bear market high. In order to make the head and tail of these data points let us refer to our common sense guide to the Nifty historical valuations. The following table is a reproduction from the Nifty Fundas page accessible from this blog's home page. 

Common Sense Guide to the Nifty Historical Fundamentals

According to the common sense guide,  the PER of 22.32 is in the High Valuation range while the PBV of 3.69 is somewhere between the long term average and high valuations. However, the DY of 0.94 is already in the very high valuation range. On speculating about the reason for these anomalies, we may come to the conclusion that the India Inc is still in the mode of conserving and raising cash and hence the low DY and the comparatively low PBV. Now the question is whether the India INC. can deliver a growth of  profits which is above 25 %. The current valuation seems to be justified only by a minimum growth in profits of 25 % in the coming year.

For more information on the common sense analysis of Nifty long term historical valuations, please read Nifty Fundas.

Happy Investing and Trading!!!

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1 comment:

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