The Nifty has reached levels of 9000 and the Sensex has reached levels of 30000 in the 1st week of March 2015. The Nifty trades at 24x its earnings and the Sensex trades at 20x its earnings in the current scenario. The Nifty traded at 29x its earnings during the peak valuation reached in the month of January 2008 that saw the index scale record high levels of 6300.
The stocks responsible for the rise in the value of Nifty to record high levels of 6300 in January 2008 are different from the stocks responsible for the rise in the value of Nifty to record high levels of 9000 in March 2015. Let us find out the stocks responsible for the Nifty highs in 2008 and highs in 2015.
Although all the 50 stocks in the Nifty index rose in the rally towards 6300 levels in 2008 and 9000 levels in 2015, the sectors that led the rally are different in both the cases. Sectors such as Power, Realty, Infrastructure, Metals and Telecom had seen valuations reach a bubble during the 2008 rally. Sectors such as Information Technology, Banks, Auto and Auto Ancillaries, Pharmaceuticals and to some extent Consumer Goods that led the rally since the lows of 2009 have reached valuations that are expensive but not a bubble in the current scenario.
The CNX Infrastructure Index traded at a P/E ratio of 45 during January 2008 and currently trades at 21. CNX Realty Index traded at a P/E ratio of 60 during January 2008 and currently trades at 30. CNX Metal Index traded at a P/E ratio of 19 during January 2008 and currently trades at 15.
CXN Auto traded at a P/E ratio of 20 during January 2008 and currently trades at 55. The CNX Information Technology Index traded at a P/E ratio of 24 during January 2008 and currently trades at 22. The CNX Pharma index trades currently at a P/E ratio of 51 in the month of March 2015. (PE ratios are Trailing Twelve Months as per NSE Data)
Infrastructure and Realty clearly stand out in terms of valuation in 2008 and 2015. Metal and IT is almost comparable in both the time periods. Auto trades at much higher valuations in the current scenario which suggests that the expected and sustained recovery in Auto sales has already been factored in the price of stocks. A stable Government at the Centre is one of the main reasons why the Nifty has risen 45% in the last one year. The market seems to have factored in the growth that is possible due to efficient and effective governance at the Centre. Macroeconomic conditions are beginning to improve and the RBI has responded to this favourable situation by announcing rate cuts in the year 2015.
TCS, Infosys, HCL Technologies, Wipro and Tech Mahindra in the IT space have seen rise in the value of their stocks to much higher levels as compared to the levels seen in the peak of 2008. Cipla, Dr Reddys Laboratories, Lupin and Sun Pharma in the Pharma space have seen rise in the value of their stocks to much higher levels as compared to the levels seen in the peak of 2008. Hero MotoCorp, Maruti Suzuki, Tata Motors and Mahindra and Mahindra in the Automobile space have seen rise in the value of their stocks to much higher levels as compared to the levels seen in the peak of 2008. Asian Paints, ITC and Hindustan Unilever stocks in the Consumer Goods space are way beyond the levels witnessed in 2008. HDFC Bank, ICICI Bank, SBI and other bank stocks in the Nifty index that declined sharply because of the financial crisis of 2008-09 have reached very high levels in comparison to the peaks they saw in early 2008. Cement stocks such as ACC and Ambuja have surpassed levels that were seen in 2008 and reached all-time highs in the current scenario.
DLF Ltd. in the Realty space had reached record high levels of Rs.1225 during the peak of 2008 and it trades at Rs.153 in the current scenario. The wide gap in the levels of the stock during the peak of 2008 and the record high levels of Nifty in March 2015 explains the story for the Realty sector. Larsen and Toubro in the Capital Goods construction space trades at marginally higher prices in the current scenario as compared to that seen in January 2008. Tata Power in the Power space traded at a level of Rs.153 during 2008 and currently trades at levels of Rs.84. NTPC in the Power space traded at a level of Rs.280 during the peak of 2008 and currently trades at Rs.157. Clearly the companies in the Power Sector have not been able to deliver in the rally of the Nifty from 2009 onwards till today. Reliance Industries has not been able to scale high levels of Rs.1466 that was reached during the peak of 2008. The stock still trades at levels of Rs.850 in the current scenario.
Tata Steel, Hindalco Industries, Sesa Sterlite, Jindal Steel and Power and NMDC had reached record high levels in the year 2011 on hopes that the demand for commodities had recovered to some extent to that witnessed in the year 2007-08. The stocks have declined since 2011 peaks to the current levels that are either mostly lower than that seen in 2008 or almost the same. Demand for commodities especially in the metals space has failed to pick up as the major consumer China struggles to grow.
The slow growth in the earnings of the companies in the Realty, Infrastructure, Metals and Power space in comparison to faster growth in the earnings for companies in the IT, Auto, Pharma and Banks space seems to be the clear cut reason behind the stocks responsible for leading the Nifty index levels to 9000. Given that the macroeconomic conditions are expected to show further improvement all the sectors should be able to grow in tandem in the longer time frame. The Government should therefore ensure that justice is done to those sectors that have failed to grow as per the expectations of the investors through better policy planning and implementation.