The fall in the Indian stock markets in the past months has obviously led to lower valuations. But what are our valuations now compared with other markets? We take a look here at the price-earnings, or P-E, estimates for the S&P/Citigroup broad market indices.
The data estimates the next one year’s P-E multiples of various countries and regions on the basis of consensus, or the average of, analysts’ earnings estimates computed by the Institutional Brokers’ Estimate System, or IBES, an internationally recognized guide to consensus earnings forecasts.
As expected, the numbers show that the next one year’s P-E estimates for the Indian market has declined from a high of 25.62 at the end of last December to 18.53 at the end of March 2008. What’s interesting, however, is that the premium that the Indian market commanded compared with other emerging markets has been squeezed sharply between December and March.
According to the S&P/Citigroup indices, the premium for the Indian market over other emerging markets has come down from 64% at end-December to 38% by March-end. That’s slightly higher than the premium at the end of June last year.
In other words, the rise in valuation as a result of the flood of money hitting Indian shores late last year has been corrected, though India continues to be the most expensive market in terms of the S&P/Citigroup indices.
Interestingly, the S&P/Citigroup Emerging Markets, or EM, index used to trade at a discount to the World index till last September, until the emergence of the credit crisis in the West depressed valuations in the developed markets. At the end of March, however, the EM index was trading at a small premium of 6% to the World index. But the US market had a forward P-E of 13.76 at the end of March, slightly higher than the EM P-E of 13.42, although the premium for the US market has declined substantially since last June.
It can be argued that the P-E numbers don’t mean much, as earnings will be revised downward as the global slowdown takes hold. But if we assume that the revisions will affect all markets, we can still draw conclusions on the basis of relative P-Es.
Clearly, valuations in the developed markets have fallen more than those in emerging markets, given that the credit crisis hurts them the most. India’s premium over other emerging markets is now even lower than before the credit crisis hit, implying that much of the froth has been wiped off and the rise and fall in our markets may henceforth be in tandem with other emerging markets.
A boon for Orchid Chemicals shareholders
About three weeks ago, drug firm Orchid Chemicals and Pharmaceuticals Ltd had lost 45% of its value in two trading sessions, thanks to a distress sale by Bear Stearns Companies Inc., which in turn led to margin calls on loaned shares held by the company’s promoters and eventually, another distress sale in the market.
A margin call is a broker’s demand for additional funds or securities because the value of an equity has fallen below a required minimum.
Back then, this column had noted that the only positive for the stock is that the company is available cheap, and with the promoter group strapped for cash, there could be a bid for it.
Things have moved fast since then. Solrex Pharmaceuticals Co., believed to be part of the Ranbaxy group, picked up 7.5 million shares, or an 11.38% stake, in the company between 31 March and 7 April. The majority came through bulk deals, while about one million shares seemed to have come through open market operations. Based on the bulk deals data, the average cost of acquisition is about Rs177 per share. There were some more bulk deals on the Orchid counter on Tuesday, which coupled with unusually high volumes, suggest that the acquirer continued to mop up shares.
After the promoter group’s distress sale in March, its stake in the company has fallen to 15.87%. If Solrex’s stake exceeds 15%, it can make an open offer to buy another 20% from minority shareholders. It’s a tall task for Orchid’s promoters to make a counter-bid, given that they have no money.
Solrex’s acquisition price of about Rs177 is at a valuation of less than nine times past earnings and less than one time past revenues of Orchid, which seems like a steal, considering Citigroup’s recent estimate that the company’s earnings per share will grow at a compounded average rate of 48% in the three years between fiscal year 2006-07 and 2009-10.
And if the acquirer is an associate of Ranbaxy, it will help the latter consolidate its position in the industry, thanks to Orchid’s strength in the antibiotics space.Orchid focuses on high-end products such as sterile injectibles, where the entry barrier is considered to be high.
Thankfully for Solrex and perhaps Ranbaxy, the entry into Orchid itself may hold fewer barriers. That’s unless a third party comes up with a counter-bid. Investors in the company would also be relieved, as Solrex’s activity has led to a 125% jump in Orchid’s share price from its recent lows.
A bid for the company seems to be the only way investors will gain. Otherwise, it stares at a huge $175 million (Rs700 crore) foreign currency convertible bond, or FCCB, issue ending up as debt, further worsening the company’s debt-equity ratio.
On the other hand, if the bid is successful and the shares jump further, theacquirer needs to be mindful that Orchid’s equity could dilute by as much as 40%, thanks to FCCBs and warrants issued to promoters. But that may still be a long way off, considering that the conversion price of FCCBs are about Rs350 per share and the current price is Rs240.
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