Stock Shastra

The Financial Year 2012 saw negative news continue to pour in for the market. Since the 19,000 level seen in March, Sensex has dropped more than 10% over the last two and a half months. The factors leading to this fall include inflation, rising interest rates and weak global cues. Inflation has been one of the key concerns for the Indian companies affecting earnings in the previous quarters. To tame the inflation, the RBI has continued tightening the monetary policy by rising interest rates.

So, how have the Sensex companies performed on the earnings side for the March quarter? And most importantly what action should you take considering the Sensex@MRP?

The New Year has not started on a good note for the Bulls. Since the 20,000 level seen in December, Sensex has dropped more than 2000 points over the last 2 months. The factors leading to this fall include the deluge of scams that have cast a shadow on the governance issues in the country and fears of high inflation affecting the profitability of India Inc.

So, how have the Sensex companies performed on the earnings side for the December quarter? And most importantly what action should you take considering the Sensex@MRP?

After a fiery Diwali which saw the Sensex touch the 21,000 mark, it has been a downhill ride for the benchmark Index. Various factors seem to have triggered the fall including profit booking, global cues and most recently the housing loan scams. However, with the preceeding rally being fueled largely by liquidity, speed-breakers like these are not totally unexpected.
But, apart from these liquidity and event-induced movements, how have the Sensex companies performed. And more importantly what does the Sensex@MRP for the September quarter indicate?

At MoneyWorks4me.com, we have tried to ascertain the fair value of stocks and make them available to retail investors in a form they are most accustomed to – MRP. We have also extended the MRP concept to the benchmark indices – Sensex and Nifty. Having done this, a few days back, we had a chat with the Editor of Outlook Profit, N. Mahalakshmi who was instrumental in propelling us to do a rigorous analysis of the concept of MRP for stocks and indices. Here is what she had to say.

The last week was full of action for the stock markets. The week opened with Sensex, the benchmark index crossing the 19,000 mark for the first time since the peak of January 2008. More was to follow as the rally has continued for the next few days and led to Sensex crossing Sensex@MRP for the June 2010 quarter which stands at 19295.
Sensex@MRP gives you an indication of whether the Sensex is fairly valued or whether irrationality is driving the markets. It is the intrinsic value of Sensex determined primarily by the earnings of the Sensex companies. So, the logic here is, if Sensex goes above Sensex@MRP, it signals that the market is moving from being rational to being irrational. It means you have to become cautious because if it continues to rise further, this rise is not justified by increase in earnings; it would thus be time to start selling [...]