BSE Sensex is on a roll. The index touched a record high of 35,798 yesterday. Considering a span of one year, the benchmark index has delivered a 32% return. Such superior returns within a short span have occurred after almost two decades.
BSE SmallCap and BSE MidCap index too have delivered mind-boggling returns in the preceding year. Both the indices have shot up by 53% and 41% respectively.
The index has surged mainly on the back of huge domestic inflows coming into mutual funds. Indian entities have been enjoying the liquidity induced music for a while now. But they got the real taste of it only in 2017 when domestic mutual funds joined the party. With about 50 to 60 billion rupees of SIP money every month, the funds were keen to join the dance floor.
Given the sharp surge, the Sensex price/ earnings (P/E) ratio has risen to 26 times. This is way ahead as compared to the ten-year median price/earnings (P/E) ratio of 19.6 times. This ratio indicates that the benchmark index could well be in a bubble territory (subscription required) as of now.
The benchmark index lost around 4,000 points within a quick span of one month during the 2008 financial crisis. At that time, the benchmark index was trading at a P/E ratio of around 28 times.
Subdued earnings have led to the P/E ratio remaining high. It's high time that corporate earnings catch up to the market's expectation. In-case they don't, a crash as seen in the earlier years cannot be ruled out.
Investors also should bear in mind that the liquidity tide cannot continue forever. It is bound to go out. And most funds may then want to exit the party in a hurry. Even if that means selling the stocks of some strong financial entities at throwaway prices.
ONGC has announced to acquire government's 51% stake in HPCL for Rs 369 billion in an all cash deal. It will allow the government to meet its disinvestment target.
As far as ONGC is concerned, the deal will place ONGC in league of major international players in oil and gas space and give it the muscle to bid for high investment projects.
While ONGC is primarily an upstream company, engaged in oil and gas production, HPCL is an oil refiner for which main input is crude oil. HPCL's acquisition would make ONGC the third biggest refiner after IOC and Reliance Industries Ltd. The acquisition will diversify the business across the value chain and will provide a natural hedge to the volatility in oil prices to some extent. Since ONGC will also be getting access to HPCL's marketing network and asset portfolio, overtime it could lead to better synergies. On the flip side, there could be some teething issues while integrating the operations of two behemoths.
The deal values HPCL share at Rs 474 (18% higher than the current stock price). However, this is lower premium than what the market was expecting.
While the deal clearly serves government's purpose to raise money from divestment, the amount required to fund the deal is 1.2 times the cash and current investments with ONGC (as on 31st March FY17). One must also note that while ONGC has negligible debt on balance sheet (0.26 times in FY17), HPCL's debt to equity ratio (FY17) stands at 1.1 times. As such, this will burden ONGC's balance sheet.
The final debt to equity ratio for ONGC will also depend on how ONGC chooses to fund the deal (It could raise debt or monetize its assets in GAIL and other investments, or both). That said, ONGC's board has approved raising the borrowing limit from Rs 250 bn to Rs 350 bn, so there is a possibility that the deal would include the use of debt.
The likes of Can Finance Homes, Edelweiss Financial Services, Symphony, RBL Bank are expected to be in the news today as they declared their results for the quarter ended December 2018.
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