This Diwali, real sale is in the stock market

MUMBAI: “Aap ke zamaane mein baap ke zamaane ke daam,” goes a McDonalds advertisement. A similar situation prevails in the stock market right now, as far as prices of blue-chip stocks are concerned. There is a Diwali sale on.

On Monday, the Bombay Stock Exchange Sensex fell by 2.2% to close the day at 8,509.56 points. But that’s the good news. During the course of the day it had touched a low of 7,697.39 before recovering more than 800 points.

Hoards of stocks are now selling at prices which are way off their prices last December. The key figure that suggests this is the price to earnings (PE) ratio (current market price divided by earnings per share) of Sensex companies. This ratio currently stands at 10.4.
What this means is that for every rupee of company earnings, investors now need to pay Rs 10.4 as market price. In comparison, the average PE since the year 2000 has been 17, which means Rs 17 had to be paid for every rupee of earnings.

Not surprisingly, equity analysts are forecasting a better Diwali next year rather than this time. Nandan Chakraborty and Sachchidanand Shukla of Enam Research say in a recent report that their target price for the Sensex is 12,807 next Diwali - and maybe even 15,000, if things go right in terms of policy changes and economic developments.

In short, their moderate target for Sensex returns is around 50% more than Monday’s close. In the best-case scenario, they expect key index stocks like Reliance and ICICI Bank to give returns in the range of 140-150%. Their target prices for stocks like Sterlite and Hindalco, if achieved, offer returns greater than 150% (see table).  Turn

Reliance Industries closed the day at Rs 1,074.70 and has fallen by 62.7% from the December 31, 2007, level. “The company is in the energy sector. Whether the economy is growing or not energy will be needed. The Krishna-Godavari basin business, too, would start flowing. At the current valuation there is no downside risk that I see,” says Deven Choksey, chief executive officer at KR Choksey. Choksey is also bullish on construction and engineering major Larsen & Toubro. “If the economy has to grow even at 6%, infrastructure has to be in place. Also the nuclear power deal should work in favour of the stock,” he says.

Bharat Heavy Electricals Ltd is another engineering and construction company on which experts are gung-ho. “The construction and engineering sector offers tremendous value and growth. I see 25-30% growth for the next one or two years,” says Asit Kotecha, managing director, ASK Securities. The stock closed the day at Rs 1,080.25 and has fallen 58.2%, since the beginning of the year.

Experts are also bullish on cement major Grasim, which has fallen by almost 74% to Rs 952.65 since the beginning of the year. “At the price at which Grasim is trading after correcting, there is no way one can get a cement plant,” says Vikas Khemani, head of institutional equities, Edelweiss Securities.

Khemani is also positive on GVK Power and Infrastructure Limited, a stock which has fallen by 86% to Rs 11 since the beginning of the year. “The stock has corrected 80-90%. It has a power plant and buoyant cash flows and the Mumbai airport contract,” says Khemani.

Experts see buying coming in from domestic institutional investors led by insurance companies. Chakraborty and Shukla of Enam write that insurance companies will make purchases worth $5 billion in the first three months of 2009.

So the point that the experts are making is, buy stocks right now, and next Diwali, you might just be saying “I’m loving it.”