Nifty@5650 !! Where to go from here ?

The confidence of investors in the Indian markets is at high again. From the lows of 4800 level in May 2010 the Nifty is now at 5650 i.e. 850 points in less than 6 months or around 18% rise. In the process Indian markets have outperformed every other major market in the world which are all down anywhere between 5-10% be it US or China.
FII confidence is also at all time high in the Indian markets so far this year we have received close to USD 13b investments. Barring May 2010 virtually every month we got on an average couple of billion USD FII money in to the Indian market.
The optimism in the Indian markets is mostly driven by two factors
1) High growth expectations ( 8% GDP growth)
2) Cheap money from the developed economies (In the name of stimulus)

Let us discuss about these two factors in a leter article and discuss about the valuation of Indian markets first and see where it can go now.

Note: Mostly I track Nifty and for this discussion is also based on the NIFTY index.

Historical Nifty Levels

Historically Nifty on an average for the last 10 years traded at an average PE 17-18 and above a PE of there is always a chance of deep correction to 15-16 PE (Average). In most of the cases the correction was to 13PE. Also on the other side a 12-13 PE on the Nifty is the safest time to invest time to invest with most of the time Nifty moving to 20PE after it on an average.

Below is a 10 year historical PE graph of Nifty.

From this graph it is evident that 8 times in the last 10 years Nifty has gone above a PE of 20 and in all the cases there has been a significant retracement.

The current PE of Nifty (Trailing) is 23.73 from an EPS of 238 and this does smell danger to me. The reasons are many from slow earnings growth to slow earnings growth and other factors that can affect the flow of cheap money in to the country.

But this does not mean that I am bearish on the Indian economy. Just that I am not that comfortable with the high valuation at this point of time.

May be the markets can stretch little bit more but the risk reward ratio does not favor for investment at this time. The consensus earnings growth for Nifty for FY11 is 10% which can take the Nifty EPS to 260 in the most optimistic case but that is again 3 Qtrs away.

The average peak PE for the last 10 years is 23.3 (From the table above) so lets stretch it to 25 (I see this as highly unlikely) which gives a Nifty level of 6000 and a correction to 18PE can take it to 4300 levels.

Below is the snap shot of risk vs. reward based on a PE of 240

The most likely scenario is a peak at 5950 levels (max) and a low to 4770 levels. I would not buy for a pop for the next 300 points from 5650 to 5950 rather I would liquidate my holdings on a regular basis and would rather wait for a correction.

Info Edge: An opportunity in growing Indian online classifieds market

Here is an opportunity for you to invest in the growing online classifieds market in India. The company we are analyzing today is Info Edge which owns prominent portals like Naukri.com, 99Acres.com and JeevanSathi.com. Naukri.com is the largest online job portal in India having more than 60% market share.99Acres.com is the largest real estate listing portal in India and JeevanSathi.com is the 3rd largest online matrimony portal in India.

Option Strategy March 2010

It is time to implement our strategy for this month. Our decision to wait till the budget event to get over has really paid well. Now the market is at least 5% above the budget levels.

Before discussing this month strategy here is my post which describes our option strategy

This month I am following a staggered approach when you will only sell options which are worth half of your margin money. Since I am slightly bullish on the market I expect to sell rest of the options as the market goes up from here.

Sell the following call options

March 5200 Call Option at 50Rs – 6x lots


March 5300 call Option at 19Rs – 4x lots (this is optional I had some margin left so I sold this one)

April 5300 Call Option at 74Rs – 6x lots

April 5400 call Option at 45Rs – 10x lots

May 5100 Call Option at 210Rs – 2x Lots

This time the premium is slightly low as most of the market men expect a correction (which is another reason why the market goes up)
 
Tomorrow if the market is up then i plan to deploy another 20% of the margin money by selling higher call options. however if the market goes down then i would wait and just watch these options decay :-)
 

Sulzer India. Will delisting happen?

Sulzer India announced its plan to delist the shares from the stock exchanges. Sulzer, Switzerland-based parent company, an 80% shareholder of the company has proposed to acquire the remaining 20% equity shares of the company through an offer and intention to voluntarily delist the equity shares of the company from all the stock exchanges in India.

Read my initial report about Sulzer India here (Specifically read my Note of Caution section)

The company is offering 870Rs/share as an initial offer to its shareholders which will value the company at around 8 times its expected EPS of 110Rs by FY10 March. The company in 2006 also had tried to delist its shares but failed.

Will the delisting happen this time?

The company is really in a Catch22 situation now. I would say this case applies to most of the MNC’s listed in India who has high promoter stakes. Even though MNC companies want to increase their Indian operations, most of them would like to have greater control in their day to day and financial operations.