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Commentary, Opinion

Prashant Jain: We’re Going Cheap


HDFC’s Prashant Jain says It is always darkest before dawn:

Within it he sports this chart:

Prashant Jain Letter

Prashant Jain is a well respected fund manager, and has done a great job managing money.Some of the above is hyperbole – even BEFORE the general elections and BJP’s rout, in April 2004, the market had a 13 fwd P/E (and yes, returns have been good).

Secondly the Jun 06 trade is JUST WRONG. The collapse of the US Housing Market was in 2007, not 2006. What happened in June 2006? The market was 30% down, after a reaction to increased margins on the NSE, some conveniently placed statements by the then Finance Minister about taxing capital gains, and the general lack of liquidity after people had piled on to the RPL issue.

(Ok, I’ll also show off: I wrote after the RPL issue that it was time to slow down – and to get out of the market then. But I didn’t tell you to buy after the carnage, so that makes me half a good guy. I guess.)

Thirdly, what was Mr. Jain’s fund house – HDFC Mutual Fund – saying at the time? On May 2, 2006, Jain said, in the monthly newsletter that:

    • Two years of growth is now priced in
    • Sensex at this time (12042) according to that newsletter was around 19 times 1-year forward earnings. That means 1 year forward earnings in April 2006 = 635.
    • In two months – Jun 2006, how come (from the above table) 1 year fwd earnings became 715? (Calc:  9296 sensex level divided by the 13 number above=715).
    • Somehow in a month or two, when the indexes absolutely tanked (fell 30%), the sensex forward earnings somehow went up 15%.
    • According to my calculations, Sensex forward P/E even then was around 15.

So yeah, nice to hear and all that but ground situations are always different. We all learn, and I’m sure Prashant has learnt too, and I don’t grudge him his statements one little bit. We all get carried away and thank goodness there is no license required.

Also, note that events are convenient, and the values also. Forward P/E is supposed to be 13, which implies a Sensex EPS of 1300. It’s at 1050 today. Will we see 25% earnings growth across Sensex companies? When interest rates are going up and inflation continues to eat away at manufacturing margins? (My answer: no.)

I’ve been saying this for the last three years – that we will not grow earnings 25% – and we have not. Yet, we hit a new high last year; that high came entirely from P/E expansion, not earnings. So yeah, if you want to bet on another round of P/E expansion, now is a good time.

Jain mentions that a falling crude price will help us. Unfortunately it hasn’t in the recent fall – Brent, which is a big part of what we buy, is above $100. The big oil companies, having taken losses on retail fuels when oil was high, aren’t quite willing to reduce prices easily. With easy money now flowing from Europe (probably trillions, if Italy and Spain are rescued) and Japan (more than $600 billion), I don’t expect crude to stay too low for too long. The one factor that can change things is that the rupee can fall, and help us immensely, but it doesn’t look like anyone has the stomach for that. But to bet on India right now, according to me, involves an implicit bet on the rupee rising.


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