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27 October 2009
Visit us at http://www.MoneyWorks4me.com/ Page 1
Making sense of the Market thro’
 
Sensex@MRP
 
The BSE Sensex is the barometer of the mood of the Indian stockmarket. From a Jan 2008 high of 21,000, it touched a low of 7,697 inOctober 2008. Now in October 2009, 1 year later, we are around17,000.There is much debate, lots of opinions being expressed on TV, in thepink papers, in the Internet on: Are these levels justified? Is the Sensexdue for a correction? Where will the Sensex be by the year-end andthe next year?In this report, we suggest a way to ‘Make sense of the Market’ thro’ aconcept that we as consumers are all familiar with: MRP- MaximumRetail Price. When we go to buy a soap, a shirt, a chocolate we look atthe MRP.
Don’t we wish our stocks come with an MRP marked onthem? At Moneyworks4me.com we have done precisely this.
Let’ssee how.
What should be the basis of calculating the MRP of a stock?
Themaximum price that an investor should be willing to pay for a stocktoday depends on the return on the investment that he expects whenhe sells the stock in the future. When you invest in stock markets youare taking on additional risk which you would avoid if you invested insay bank Fixed Deposits. Hence while calculating the MRP, we havetaken a Minimum Expected Rate of Return of 15% CAGR.
MRP is the maximum price one shouldpay for the stock. Minimum Expected Rate of return whenyou invest in stocks should be 15%CAGR.
 
 
Making Sense of the Market thro’ Sensex@MRP
Visit us at http://www.MoneyWorks4me.com/ Page 2
The next challenge is: How do you estimate the future price of thestock?
Here we are guided by what Benjamin Graham has said aboutthe stock market. He said that in the short term the stock market is like avoting machine and in the long term it acts like a weighing machine.What this means is that the future price of the stock, in the long termdepends on the real worth of the stock i.e. its ability to generateearnings per share, EPS. Thus as a savvy investor, you must track theEPS growth rate of the company you are investing in. This will enableyou to estimate the future EPS of the stock.
At Moneyworks4me.com, we have computed the MRP of all thelisted stocks after a thorough analysis of the companies, theirfinancial track records and their future growth prospects.So how do we find at what level the Sensex is sensible?
Considering that the Sensex stocks are the top traded stocks of thecountry, we can expect them to be traded at their MRPs. So let’s see ifwe can make sense of this “barometer of the Indian Stock Markets”and arrive at an indication of whether the Sensex is fairly valued orwhether irrationality is driving the markets.The obvious method is to find out at what price should each of theSensex 30 stocks trade at, i.e. their MRP. We can then plug in theseprices and check out what could be considered as a sensible level forthe Sensex. We like to call it Sensex@MRP.The free float market capitalization at the MRP of the individual stocksas computed by us at Moneyworks4me.com and share data as on 14thOct 2009 is Rs.1,323,663 Crore. Using the index divisor 74.42 (as on14th Oct) the Sensex@MRP is 17,786.Sensex@MRP Calculation:
Free Float Mkt. Cap. using MRP 1,323,663Index Divisor 74.42Sensex @MRP 17,786
Factoring an
estimated 15%
increasefor the September quarterearnings (YOY) of the Sensex companies, the Sensex@MRP goes upby
691 points to 18,477.
 
How do you calculate MRP?The Sensex @ MRP indicates the pointbeyond which markets are driven moreby liquidity and irrational expectations.
 
Making Sense of the Market thro’ Sensex@MRP
Visit us at http://www.MoneyWorks4me.com/ Page 3So what does the Sensex@MRP tell us? Should we be buying orselling? Isn’t this the question being asked often?
What we candefinitely conclude is that the market is approaching its outerlimits. This is certainly not the time to buy stocks without lookingat valuations and hope that another bull run will happen. Any badnews can trigger a sell off and a correction. It’s not that all theproblems of the past are over and we are on a fundamentallystrong wicket. It is just the increased liquidity that has attractedmoney into the market.
 
Here is what we recommend you do
: The real question you shouldask yourself is: Should you be willing to buy stocks at their MRP? AtMRP you can expect to get a 15% return on your investment. But haveyou factored in a Margin of Safety as the guru Benjamin Grahaminsists on doing? No you haven’t! This is crucial as you should beselling stocks which have crossed their MRP and buying only with aMargin of Safety.
As wise investors you should sell off stocks which are tradingway above their MRP and you have already made handsomegains. Similarly if you have invested in mutual funds, review theirperformance and consider starting to sell. Use the money if youneed to or just park it and wait for a correction. If you stronglybelieve a significant correction is unlikely to happen and wish toremain invested in stocks, do so only in select stocks tradingclose to their Discounted Price (half of MRP). Only a few goodstocks are now available at less than Discounted Price.We believe the Sensex around 18,000 indicates the level beyondwhich the markets may be driven more by liquidity and irrationalexpectations about the future.
Have we been cautious or aggressive when predicting the future EPSand P/E? Maybe we have been a tad cautious. The MRP is based onthe latest TTM EPS, so if you expect an increase of 10% in the EPS inthe next few quarters shouldn’t the Sensex touch 19,500. Maybe it will,considering that there is too much of good news floating around in themedia. Maybe the market has already factored that in. Maybe it will fallif the FIIs decide to book their profits and take their money someplaceelse. But then all these ‘may-bes’ make it a gamble. Is that what youwant to do?
Equity Analyst:
Nikhil Kalenikhil.kale@moneyworks4me.com 
Any bad news can trigger a sell off and acorrection.
 
Sell stocks which have crossed theirMRP and buy only with a Margin ofSafety.
 
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