Our investment practice and approach today have made us sit on a large chunk of cash. This doesn’t mean that we are expecting bears taking a grip of the market. What this means is that overall market is swaying away from rationality for the time being.

Markets have all rights to stay irrational as much time and this is the reason when I read that market is heading towards 9000 or 10,000 levels in the short term doesn’t bother me because I believe that it is possible.

Markets have their own brain and predicting them is similar to predicting weather for tomorrow or a week after. In this situation the best thing is to monitor your own stock holdings in the portfolio and take advantage of selling the one which have reached far away from its rational values.

In these situations we also scan the market and try to find opportunities with the help of calculating its enterprise values (EV) and use this tool to locate the cheapest sector trading in the market.

Calculating EV is very easy. You just need to calculate the total market cap (number of shares* stock price) of the stock and add the indebtedness of that business and divide them by EBITA (Earnings before interest, taxes, amortisation and depreciation).

We calculate EV because it ignores the growth, cost of growth and also we do not use PE ratios as we believe that this ratio is overused and is also not that effective.

 

ACC CEMENTS 12.67 times
AMBUJA CEMENT CEMENTS 14.54 times
ULTRATECH CEMENT CEMENTS 19.58 times
SHREE CEMENT CEMENTS 16.14 times
BAJAJ AUTO 2 WHEELER 12.27 times
HERO MOTOCORP 2 WHEELER 13.23 times
TVS MOTORS 2 WHEELER 20.05 times
BHARTI AIRTEL TELECOMMUNICATION 7.83 times
IDEA CELLULAR TELECOMMUNICATION 8.18 times
RELIANCE COMM TELECOMMUNICATION 7.95 times
TATA COMM TELECOMMUNICATION 6.08 times
LARSEN INFRASTRUCTURE 19.05 times
ADANI PORTS INFRASTRUCTURE 18.33 times
BHEL INFRASTRUCTURE 10.94 times
ONGC OIL DRILLING & EXPLORATION 6.07 times
GAIL OIL DRILLING & EXPLORATION 8.13 times
CAIRN INDIA OIL DRILLING & EXPLORATION 4.20 times
OIL INDIA OIL DRILLING & EXPLORATION 5.83 times
COAL INDIA MINNING/MINERALS 9.95 times
SESA STERLITE MINNING/MINERALS 3.40 times
NMDC MINNING/MINERALS 6.82 times
DLF CONSTRUCTION 13.97 times
PRESTIGE ESTATE CONSTRUCTION 11.28 times
OBEROI REALTY CONSTRUCTION 10.52 times
HCL TECH COMPUTER SOFTWARE 12.12 times
TCS COMPUTER SOFTWARE 16.69 times
INFOSYS COMPUTER SOFTWARE 13.24 times
WIPRO COMPUTER SOFTWARE 11.91 times
TECH MAHINDRA COMPUTER SOFTWARE 11.60 times
MINDTREE COMPUTER SOFTWARE 12.69 times
NIIT TECH COMPUTER SOFTWARE 7.06 times

 

Looking at the list of the companies above, it looks the most expensive sector is the infrastructure sector. To follow next is the cement sector and then the IT sector and construction sector. The cheapest sector is the oil drilling and exploration sector, mining and minerals and telecommunication sector.

Well, that justifies to us because the new government had invested most of the government funds in the infrastructure sector in the last 100 days. Oil & drilling sectors and Telecommunication sectors are yet to be touched or are somewhat in scrutiny with licenses and spectrum auction.

In the end let’s talk about limitations about EV, this ratio cannot be used on capital goods sectors like Banks, NBFC’s etc. also the above companies EBITA is the consensus expectations for the year end 2015. If the EV valuations are low then it doesn’t mean that they are good to buy or vice versa. We use this ratio to just cross check our valuations and get clearer picture on individual businesses and help us to compare apple vs apple.

If you find any sector that looks attractive to you then please share with us.