Margin of safety in investors' favour
As I write this article, the Sensex trades at 16,719 levels, discounting FY13 earnings per share at PER (price-to-earnings ratio) of 13 times, lower than the past 10 years’ average of 13.6 times. Margin of safety, the terminology coined by Benjamin Graham and David Dodd, and sworn on by global investors like Warren Buffett, is one of the major investment principles we follow rigorously.
I believe at current valuations, the margin of safety is in favour of investors looking to invest in India.The margin of safety, coupled with the growth prospects for corporate India in FY13, makes us positive about the prospects for the equity market. We expect inflation and interest rates, which adversely impacted equity markets during FY12, to turn favourable in FY13.
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This, we believe, will make equities attractive as compared to other asset classes. On the whole, we expect earnings growth to revive to 13-15 per cent in FY13, after registering around seven per cent in FY12. Expectations from the government are very low. Pessimism has engulfed the investor community today, with even business dailies like Financial Times and The Economist, portraying a negative picture of India. Definitely, the past couple of years have been a tale of missed opportunities.
However, the government is working towards removing stumbling blocks in major infrastructure sectors — a critical area of focus to restore the above eight per cent gross domestic product growth engine. Headlines from local dailies clearly indicate the same — ministries, bankers, companies and industrialists all working together to removing obstacles to growth in key sectors like power, roads and telecom.
In the power sector, SEB (state electricity board) reforms are on the cards with a few already raising rates by up to 40 per cent. In the road sector, NHAI awarded 16.4 km/day in FY12, a significant increase compared to nine km/day in FY10 and 13.9 km/day in FY11. It targets to award 25 km/day in FY13, a clear indicator of revival in infrastructure.
FY13: Year of positive returns
We believe FY13 will be a good year for investors and expect the Sensex to deliver 15-18 per cent upside from current levels.
In the range-bound market, there is a good possibility that many stocks (including large caps) deliver 25-30 per cent upside. If one were to look at precedence, in FY07 the Sensex delivered 18 per cent return but 150 of BSE 500 companies delivered more than 20 per cent returns. In FY08 as well, when the Sensex delivered 20 per cent returns, 200 of the BSE500 companies delivered returns significantly higher than 20 per cent.
I think there is a strong possibility of FY13 turning out to be like one of these years. If the market delivers 15-18 per cent upside, many stocks in mid/large caps have the potential to deliver much larger gains than the benchmark returns.
The author is managing director, ALFAccurate Advisors