Saturday, October 06, 2007

Sensex - 20/20 champion by year end!

Will SENSEX go Up or Down ??

If the current euphoria in India Inc is to continue, then I predict the Sensex to cross the 20K mark by the year end.

At the current bull run the BSE bellwether index is trading just a notch above its long term historical P/E average (current P/E of about 24 vis a vis average since 1991 being 21.65). Current P/E is largely a result of the bull run seen in the last 12 sessions. Market is still at a lot lower P/E than what it had seen during the downturn of Jan 2000. The market needs to be more than 21K today to reach that levels of P/E.

The Q2 earnings will start coming in soon and the expectation is that India Inc will grow again by a handsome figure in the north of 10%. So the current P/E ratio (and even the historic one) justifies 20K by the end of Q3.

Another interesting fact here is the Price to Book Value ratio. It is currently at its highest value in more than last 10 years. Is this a sign of worry? Traditionally price to book value was in good correlation with P/E but currently it looks somewhat overheated. But here my belief is that it is largly due to the run in real estate prices. For many companies the book value of these assets depicts the historic value but today the market values them much more. So unless real estate prices crash, which is unlikely for commercial property, the current market levels should be sustainable and very much bullish.

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