After opening the day in green, share markets in India witnessed positive trading activity throughout the day and ended the day on a strong note. Gains were seen across most sectors with stocks in the auto sector and stocks in the IT sector, leading the gains.
At the closing bell, the BSE Sensex stood higher by 233 points (up 0.7%) and the NSE Nifty closed up by 61 points (up 0.6%). The BSE Mid Cap index ended the day down by 0.7%, while the BSE Small Cap index ended the day down by 1.1%.
Asian stock markets finished in red. As of the most recent closing prices, the Hang Seng was down by 0.6% and the Shanghai Composite was down by 1%. The Nikkei 225 was flat. Meanwhile, European markets were trading on a negative note. The FTSE 100 flat, The DAX, was down by 0.4% while the CAC 40 was down by 0.1%.
The rupee was trading at Rs 63.5 against the US$ in the afternoon session. Oil prices were trading at US$ 69.8 at the time of writing.
In news about the economy. India's economy is expected to grow by 7-7.5% in FY19, according to the Economic Survey 2017-18.
The survey, authored by chief economic adviser in the finance ministry Arvind Subramanian, said the economy is likely to grow at 6.75% in 2017-18 against 6.5% estimated by the Central Statistics Office (CSO).
The survey highlighted that the major achievements of the past year include the Goods and Services Tax (GST), resolution of the Twin Balance Sheet (TBS) problem by sending the major stressed companies for resolution under the new Indian Bankruptcy Code.
In addition, implementing a major recapitalization package to strengthen the public sector banks, further liberalization of FDI were the biggest achievements.
The Survey said the major risk to India's growth story next fiscal could emanate from rise in crude oil prices in the international market, however, it expressed hope that recovery in investments, global investment, improved global growth outlook and stabilization of GST will, however, help pick up the domestic economy.
A pick up in the domestic economy is imperative to keep up with the increasing valuations in the equity markets.
Market Cap to GDP Ratio Close to 100%
We generally refer to PE or price to earnings ratio to gauge whether the market is undervalued or overvalued. If we go by this ratio, the Indian market is clearly in overvaluation territory. The Sensex and the Nifty trading at a PE of 25 and 26.9 times respectively. The midcap and smallcap indices are trading at insane valuations at PEs of around 46.4 and 113.8 times. Mid and small caps have never seen such crazy valuations.
There is still another ratio, which is frequently used to evaluate the valuations. The market capitalization to GDP ratio. It is one of Buffett's favorite indicators of broader market value. The market cap of all the listed companies in the country divided by the gross domestic product (GDP) of the country gives us this ratio.
The idea behind this ratio is simple. Stock prices are derived from expected earnings for corporates and GDP represents revenue of the country. This gives investors an estimate of whether the two are moving in tandem. A ratio above 100% shows overvaluation and one below 50% shows that the market may be undervalued.
Even this ratio is showing valuations reaching its peak levels. India's market cap to GDP ratio reached 95%. This ratio was more than 100% after the 2007 bull run. Stock prices had seen a significant meltdown after that amid the global financial crisis.
The expansion in market cap was the result of a considerable re-rating of a majority of stocks in the last 12-18 months. Besides the sharp share price increase, high equity issuances, particularly initial public offerings (IPOs), have contributed to the increase in market cap this year. Despite re-rating, earnings are yet to stack up. This may make stock prices unsustainable at higher levels.
2018 will, therefore, be critical for Indian companies to justify their valuations with earnings growth. Investors must remain cognizant about valuations and ensure they take some profits off the table whenever the opportunity is ripe for the picking.
Moving on to news from stocks from the automobile sector. Maruti Suzuki share price was among the top gainers on the bourses today after the company's board approved reducing royalty rates for new models.
The new method will be applicable on all new models launched by Maruti Suzuki since January 2017, starting with the urban compact hatchback Ignis. Maruti Suzuki pays royalty for some of its products in Indian rupees, which protects the company's earnings from adverse currency fluctuations.
In the December 2017 quarter, Maruti paid 5.3% of its net sales as royalty to its parent Suzuki Motor.
New royalty rates are likely to be lower than the current structure as India's R&D division has also started contributing to vehicle development. Maruti has put in place a new R&D facility at Rohtak in Haryana. It plans to invest a total of Rs 40 billion at the R&D facility.
Maruti Suzuki share price ended the day higher by 3.9%.
And here's a note from Profit Hunter:
Despite the Indian indices trading strong near its lifetime high, the pharma sector witnessed selling pressure. Drreddy(-5.90%), Lupin (-4.20%), and Glenmark (-2.75%) are the top losers in the Nifty Pharma index.
Dr. Reddy's Laboratory announced its Q3FY18 results in the last trading session. And the stock is down nearly 8% in the last two sessions.
Last time we reviewed the stock, it had sold off 23% after resisting from the important resistance level of 2,750 to drop down to a four-year low. The RSI indicator also hit its ten-year low. The stock was trading extremely weak.
But we've mentioned before how the stock was approaching the centurion mark and the strong support level of 2,000. The stock slipped below this level, but it couldn't sustain down for long. It recovered immediately and rallied nearly 28% to a high of 2,615.
But, the stock found a strong resistance near the 2,600 level from the falling trendline drawn from November 2015 high. Today, it is down 6% with healthy volumes.
So is this an indicator that the stock will slip back to the 2,000 level or this is just a temporary shift from the quarterly results? Let's wait and watch...
Dr. Reddy's Plunged 6% for the Day
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