Dalal Street Investments

Comparison of 2003-07 Rally Vs 2013-Current

January 19, 2015

A comparison of the current stock market rally with that of 2003-07 shows different path of the current rally versus the previous one. Some of the differences we spotted are (1) starting valuations of the two cycles, (2) global macroeconomic environment, (3) domestic economic cycle and investment climate and (4) earnings momentum. The current one will follow its own dynamics but a comparison is useful.

The 2003-07 rally started in the middle of 2003 with the market BSE SENSEX trading at around 9X 12-month forward P/E and continued until 2007 driven by constant earnings upgrades. It reached 16X in the middle of 2007 and peaked at 23X by end-2007 in a burst of frenzy in 2HCY07. The policy rate was 6% in the middle of 2003 and went up with a fast-expanding economy (7.75% by end-2007). Finally, the cycle was accompanied by large skepticism among investors, which resulted in periodic sharp corrections in the market.

The current rally started at about 14X 12-month forward P/E in September 2013 and the market is trading at 16.6X 12-month forward P/E. The policy rate is currently at 7.75% and will likely decline over the next 12-24 months in conjunction with lower inflation. However, earnings upgrades may still be some time away.

Illiterate Congress Regime Focused Too Much on Vote Bank Politics and Killed the Economy
Banks and companies’ balance sheets are far weaker compared to 2004 levels with large reported NPLs, hidden NPLs and restructured loans and leveraged balance sheets. The government is still in the process of resolving India’s investment challenges while the policy initiatives in 2000-03 led to a massive increase in private sector capex in 2004-07 and earnings growth. We think investments in new areas of affordable housing, railways, smart cities, urban infrastructure (‘new’ infrastructure sectors) will take time (1-3 years) to fructify.

We remain positive on India’s medium-term economic story noting (1) the government’s focus on economic development, (2) India’s favorable demographics and (3) improving macroeconomic position. However, current market valuations factor a lot of the positives even before any meaningful pick-up in economic activity or earnings upgrades.


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