Coming soon: the PE prop

Stock exchanges do their bit for the rally

The National Stock Exchange and the Bombay Stock Exchange are doing their bit for the current rally in the markets. Effective December 20 (next Monday) these exchanges will revise the methodology of calculating the price-earnings ratio of their stock market indices.

Instead of using annual results for determining the denominator for the ratio, they would start using earnings for four latest reported quarters. The upshot will be a fall in the price-earnings ratio, simply because earnings for most corporates have grown this fiscal.

Based on stock prices for December 14, 2004, the PE for the Sensex would change from 19.24 (using the existing methodology) to around 16.5 using the proposed methodology.

Stocks with large weights in the Sensex such as Infosys, Reliance, ONGC and Bharti Televentures (to name a few) have seen big jumps in earnings lately. Updating their earnings till the latest quarter would naturally result in a low pre-earnings ratio.

To be fair to the exchanges, using latest earnings for the calculation is certainly better than the current practice of updating earnings just once a year.

Yet, it's interesting that this is being done when the markets are at an all-time high, especially since quarterly earnings data has been available for quite some time. Based on the new calculation the Sensex would have a PE of around 16.5, a level it last crossed in end-September.

The Sensex then was at the 5500-levels, around 14 per cent lower than the current levels. But going by the data exchanges would soon throw at you, valuations are still pretty much the same.

Vedanta/Sterlite

Strong investor appetite overseas for Indian paper was reflected once again with Vedanta Resources recently completing its debut international bond, raising $500 million from a five-year offering.

The terms of Vedanta's deal were also quite favourable vis-a-vis its global competitors "" Vedanta's issue was priced at a yield of 6.68 per cent compared to Russia's Norilsk, whose August 2009 bond has a yield of around 7.35 per cent in the secondary market.

Proceeds from Vedanta's bond issue are being used to fund the company's $2 billion (approximately Rs 9000 crore) capital expenditure plan in its subsidiary Sterlite Industries.

Sterlite Industries had reported a 74 per cent year-on-year growth in consolidated earnings before extraordinary items to Rs 167 crore for Q2FY05, largely due to the better performance of its aluminium and zinc businesses.

Aluminium prices in the last quarter had moved up approximately 21 per cent y-o-y while zinc had improved by around 19 per cent.

In its copper business, supplies of copper concentrates from its captive mines in Australia helped average treatment and refining (TC/RC) rates to improve to 6 cents a pound in the September quarter vis-a-vis an average of 4-4.5 cents a pound in the previous year.

Going forward, the company's copper division is expected to perform better with spot TC/RC rates reaching approximately 20-22 cents a pound.

Also, its aluminium and zinc divisions are expected to improve their performance over the next few quarters, as higher prices are anticipated for these metals in the new year.

Another bullish signal "" non-oil imports

Further proof, if indeed any more proof is needed, of buoyant growth in the economy is provided by the rise in non-oil imports. Non-oil imports are up 26.7 per cent in the first eight months of the current fiscal, but as the table shows, non-oil imports for November have been very high, bettering even September's record.

What's more the trend indicates a rising momentum, with the promise of even higher imports in the coming months. That fits in well with the anecdotal evidence of corporates firming up capex plans.

True, the trade deficit has been rising but with the kind of forex reserves we have today that may actually be a blessing, and a negative current account deficit for a developing country is a sign that we're putting the money to good use.

And in spite of the rise in oil prices last month, the monthly oil import bill has been between Rs 2000 crore to Rs 2500 crore almost very month, the spikes occurring in July (Rs 2692 crore) and October (Rs 2581 crore).

So far as exports are concerned, November's 25.9 per cent rise may seem very high, but that's only because exports dipped in November 2003. If the November 2003 exports were at the October level, the rise would have been only 12.3 per cent.

However, with export growth at 24 per cent between April to November, there should be no trouble achieving the 16 per cent growth target for the year.

With contributions from Mobis Philipose and Amriteshwar Mathur