Business Daily from THE HINDU group of publications
Tuesday, Dec 30, 2008
ePaper | Mobile/PDA Version | Audio | Blogs
Business Daily from THE HINDU group of publications Tuesday, Dec 30, 2008 ePaper | Mobile/PDA Version | Audio | Blogs |
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Markets
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Stock Markets
“The problem in India is that it is impossible to gather company specific balance-sheet data and then estimate corporate net worth at replacement cost,” head of Indian equities at Noble. Our Bureau Kolkata, Dec. 29 In a time of economic slowdown, are ratios such as price to earnings (P/E) and price to book value (P/B) right tools to arrive at valuation of stocks? Analysts seem to stick to the two time-tested tools, but with a difference. Noble, an Anglo-Indian investment bank, in a recent note has attempted to filter the cyclical element and factor in inflation in calculating earnings, while it tried to avoid historical book value of assets and looked at the replacement cost instead. Mr Saurabh Mukherjea, head of Indian equities at Noble, told Business Line that these metrics were used in developed markets for arriving at increasingly accepted fundamental market valuations. But in India, estimating replacement cost is a difficult proposition, hence hardly used. Mr Mukherjea said data insufficiency was the main reason for the problem. “The problem in India is that it is impossible to gather company specific balance-sheet data and then estimate corporate net worth at replacement cost,” he said. Book values of assets with no time reference to suggest as to when it was purchased or installed are inadequate indicators. Moreover, the country lacks asset inflation indices, which helps to arrive at replacement costs. Stocks, which have come into the listed space after continuing as a private entity, pose additional data-related problem regarding the assets acquired before listing. To circumvent the data-related problem, Noble has used “national accounts which contain data on the net capital stock (calculated by the Central Statistical Organisation) in the country, then estimated how much of this net capital stock belonged to a particular stock index (BSE 100) components”. To get the denominator of the ratio that is net assets at replacement cost, Noble has used net capital stock (stated in inflation adjusted terms) from India’s national accounts and multiplied it by the ratio “total earnings of BSE 100 firms/GDP”. The investment bank also used inflation index to convert the earnings to “real terms” to arrive at a cross cycle earnings of companies. It has also used past 10-year averages to capture the cyclical element. By using these hypotheses, it concluded that a significant rally in the BSE 100 is overdue, as the index has turned cheaper than its long-term average. Mr Mukherjea said: “It is unprecedently cheap now and could stay cheap a while longer.” The note said the current divergence between the BSE 100 and the replacement cost bodes well for the components. More Stories on : Stock Markets | Economy
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