Wednesday, December 20, 2006

Graham's Fair Value of sensex

What could be the fair value of sensex according to Graham's valuation methods. I recently analysed all the stocks in India using the criteria laid down in Graham-Rao Method. The article is awaiting publication. The following scrips satisfied all the criteria with the price of 15-12-2006 as the basis.

1. Cheviot co. Ltd.
2. Ucal Fuel Systems Ltd.
3. Kothari Products Ltd.
4. South Indian Bank Ltd.
5. Shipping Corporation of India Ltd.
6. Micro Inks Ltd.
7. Oriental Bank of Commerce Ltd.
8. Sutlej Industries Ltd.
9. City Union Bank Ltd.
10. India Nippon Electricals Ltd.

I also calculated the earnings based valuation of all scrips in the sensex, using 15 as multiplier for shorter period average EPS for some companies which do not have 7-year EPS data. The market capitalization came to Rs. 3,64,454 crore. The market capitalization for 19-12-2006 reported in ET of 20-12-2006 is Rs. 8,58,332 crores. The index reported is 13382.01. Hence the fair value of index will turnout to be 5682.09.

Thus the index has a huge speculative component.

In this context, it will be interesting to read the statement by Marc Faber reported in Economic Times dated 19th December in page 23. He said sustaining returns would be difficult considering the huge rise in asset prices since 2003. He also said, "you can have an expanding economy, but the market may not go anywhere."

20th December 2006
2.00 p.m.

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