April 2019 Newsletter – High PE Ratio

The markets made an all-time high in April 2019. The markets are consolidating close to these highs. The General Election of 2019 is going on and as we write this newsletter, most of the constituencies have already voted. By the time we write to you the next month’s newsletter, the election results would have been out. While the Bharatiya Janata Party is most likely to be the single largest party, the markets will be having a keen eye on the number of seats the BJP wins on its own. Anything above 220 will keep the sentiment positive on Dalal Street. However, if the single largest party fails to win 200+ seats, then the markets could react adversely. In 2009, the markets were locked in upper circuit after the Congress won 200+ seats on its own and the UPA retained power with an even more powerful majority.

Talking about the elections might be fancy, but the real issue is the missing earnings growth. The Q4FY19 earnings have been disappointing. The Nifty’s EPS has shrunk to ~ 400 per share and the PE Ratio is at a bubble territory of ~29+. These valuations are not sustainable, and we need to be very selective of the stocks that we buy now.

HIGH PE Ratios – The new normal?

In the late 90s, the dot-com boom created bubble valuations, in 2007 the economy grew at such fast pace and the markets rose up to bubble valuations. People justified those valuations citing some or the other factor behind a sustainable long-term growth in earnings. However, the valuations cooled off as the markets crashed. This time, the investor community is citing the low interest rates that are keeping the valuation levels elevated. Interest rates globally are near zero and this has created immense liquidity, a lot of which has flowed into emerging markets. Rs 67,122.07 Crores has been pumped into the Indian equity markets in 2019 by the FIIs. In 2018, FIIs had withdrawn Rs 53,020.87 Crores.

Analysts are expecting the Nifty EPS to increase by nearly 60% in FY20 because of positive earnings from banks. The NPA crisis has eroded the profitability of banks and this depressed earnings. If indeed the Nifty EPS grew by 60%, the PE ratio would cool down to ~ 20. Such expectations of a bump in earnings growth have been there for the last 3 years, but in vain.

Low interest rates mean low returns from safe assets like Government bonds, term deposits, etc. When the returns from risk free assets go down, the expected returns from equities also go down.

Risk free Equities Remarks
10% 18% When the risk-free return is 10%, I expect atleast 18% from equities
6% 12% The risk-free return is down to 6%, I am happy with 12% from equities


When an investor expects 18% returns from equities, he will want to pay lower valuations (Maybe a PE of 15). But if his expected returns from equities go down to 12%, then he will be ready to pay higher valuations (Maybe a PE of 22-25). This is a very generalized example. The financial theory behind this is an entire subject.

What makes up the returns?

Particulars 1-Jan-2018 31-Dec-2019
EPS 10 20
PE Ratio 15 20
Share Price 150 400

In the above scenario, the earnings have grown by 100% while the share price has grown by 266%. This is because of the expansion in valuation multiple that the investors were paying for the shares.

Particulars 1-Jan-2020 31-Dec-2021
EPS 20 30
PE Ratio 20 18
Share Price 400 540

In the above scenario, the earnings have grown by 50% but the price has risen by only 35%. This is because of the contraction in the PE multiple that investors were paying. In the dull market phase of 2011-2013, many good companies were available for a PE ratio of < 10. Today, very few good companies are available for a PE ratio of < 25. If we pay such valuations today and the earnings do not grow over the next 3-5 years, then the valuations will cool off and we wouldn’t be able to make such returns.

We are not saying that one should only buy stocks that are trading at cheap PE rations. Infact that is one way to load up cheap quality companies. We should pay high valuations only when we are sure that the earnings growth will continue long enough. Now, in the stock markets the ‘sure’ term doesn’t exist. So, our research is focused on determining the longevity of earnings growth, high ROCE, etc.

Very few companies can sustain such valuations for a long period of time. Most companies see sharp cool down in valuations eventually and leave behind a lot of retail investors stuck at higher prices. When the valuations are elevated, we prefer to maintain a decent cash allocation in the portfolio.

How many stocks do we own in our portfolio: Live Portfolio

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Alphamultiple Advisors – A new avatar

Dear Reader,

We have changed our firm’s name from DalalStreetBulls to Alphamultiple Advisors. Subsequently, our domain has also changed from www.dalalstreetbulls.com to www.alphamultiple.com


  • To be the most ethical, transparent and the best advisory firm
  • To deliver high returns for our investors consistently
  • To eliminate human bias from investing


  • Select the best companies to invest and participate in their growth story
  • Be part of India’s transition from a $1,600 GDP per capita to a $8,000 GDP per capita economy
  • Invest in a blend of growth and value stocks & double the portfolio every 4 years


Please note a change in our communication details:

Email Id: info@alphamultiple.comraghav@alphamultiple.com


The change is with an eye on the future. We strive to move forward in the wealth creation journey for our investors and this reflects in our new logo.

Our Logo:

alpha – It stands for the returns in excess of market’s return. We are here to generate alpha for the investors.

multiple – We have a multi-strategy approach towards the portfolio with both medium and long term investment strategies being deployed. We do not want to be a firm which is heavily dependent on a single strategy or fund manager. We believe that the future of investing lies in the elimination of human bias and the deployment of rule-based and disciplined strategies.

the greater-than sign > – The red greater than sign indicates returns in excess of the market and the placement of the sign signifies the exponential power of equities. 2 + 2 + 2 is 6 but 2^3 is 8. We are looking out for investment opportunities that can compound wealth in the long run. It also shows our intent to keep moving forward.

Best Regards,

Raghav Behani

Founder, Alphamultiple Advisors

Holi to Holi – Highest Returns

Happy Holi everyone! We hope the festival of colours brings in more colours and makes your life even more beautiful.. Just like the shareholders of these companies, the stock prices of which have made the highest returns on a YoY basis.

Which stock gave you the longest smile this Holi?

Check out a free trial of our advisory services: Click here

Mumbai Workshop


Date – 25th February 2018 (Sunday)
Time – 9:45 AM to 11:45 AM
Location – Andheri East (Telli Galli, Opp. Chatwani Hall)

Agenda of the workshop

– Broader Market Commentary (20 Minutes)
– Stock 1 Discussion (30 Minutes)
– Stock 2 Discussion (30 Minutes)
– Stock 3 Discussion (30 Minutes)

Participants will be provided with reading material and reports.


Raghav Behani
Founder, Research Head – DalalStreetBulls
(Chartered Accountant, SEBI Registered Research Analyst)


Rs 499 per head.

We have a limited seating capacity of 12 members only. The reservation is strictly on a first come basis.

Status: Close.

Budget 2018 – Snapshot for the Middleclass

Budget 2018 – Key notes

The much awaited Budget for FY19 has been presented by the Finance Minister. While we await the fine print of the budget, let us walk you through the important points that affect us in our daily lives. We will not be covering deeper issues like agriculture, rural, healthcare, etc. in this post.

i) Welcome back LTCG & Happy new year STT

Going forward, all long term capital gains (above Rs 1 Lakh) will be taxed at 10% without any indexation benefit. Long term capital gains made before 31st January, 2018 will be Grandfathered.

What is Grandfathered?

Grandfathering in legal terms means a clause that exempts a particular category from falling under the ambits of the law. In this case, LTCG tax will be applicable only on gains made after 1st February, 2018 will be subject to LTCG tax.

STT stays. The Government earns close to Rs 9,000 Crores via STT and expects to make Rs 20,000 Crores by taxing LTCG.

Our view

We always maintained that LTCG will be implemented in the future. This exemption lasted from 2004 to 2017. However, the rate of 10% might be tinkered with by future Governments.

ii) Tax on dividends from equity oriented schemes

Growth plans of mutual funds will now come with a LTCG tax of 10% and thus to bring parity between growth and dividend schemes, there will be a 10% tax on dividend income from equity schemes of mutual funds.

Our View

If you have a long term horizon and have another stable income source, continue with the growth option.

iii) Welcome back Standard Deduction

P. Chidambaram abolished standard deduction in 2005 and now it is back for salaried employees. A standard deduction of Rs 40,000 will be given to all salaried employees. However medical reimbursements and transport allowances have been done away with.

LTCG Tax explained – Youtube Video

2017: The death of debt funds

Debt funds are seen as a safe avenue for investing. Marketing debt funds is a common way for advisors to boost up their AUM. Portfolio advisors talk of debt-equity split in the portfolio as a safe-risky asset class split. After a stellar year (2016), debt funds faced a terrible year. At a time when equity markets are in a strong bull run and investors are grinning at their 20% p.a. and higher CAGR, a few are sweating over their debt fund returns even if their equity gains are pushing up the over all returns.
2017 bursts a famous myth – Debt funds are safe to invest in.
Most investors and advisors fail to deep dive into the facets of investing in debt securities. It is not simple as investing in a fixed deposit AND neither is it an alternate to fixed deposits for the layman investor. When you invest in debt, your focus is on protecting capital and not growing it – So is it worth investing in a much riskier asset for an extra 0.8% to 1% p.a.?

What went wrong?

Bond prices fell and thus yields went up. The prices of debt assets held by medium and long term debt funds slipped thereby resulting in lower NAVs. In the last quarter of 2017, the 10 year G-Sec yield rallied from 6.4 to 7.2 and this sent bond prices spiralling lower. There is still immense volatility in the yields due to different reasons and this is expected to continue into 2018, which we foresee as another tough year for debt fund investors. Bulls might be ruling the roost on Dalal Street but bears have taken complete charge of bond street.
Which funds did we advice?
We advised our clients to invest in 4 debt funds. We also shared a detailed report (available at the end of this post) highlighting WHY we chose these 4 debt funds.

Read our report for clients on debt funds: Debt Funds Outlook

What does this mean for debt fund investors?

Every debt fund investor should understand the risk factors associated with investing in debt instruments. These instruments are not as simple as a bank fixed deposit and though they offer better liquidity, higher returns and lower tax on interest, the risk is much higher than a bank fixed deposit. 2018 is going to be another tough year for debt fund investors and a careful analysis is needed before any investments are made in debt funds.
Invest in debt funds only if you are well aware of movement in bond prices or if your advisor has the knowledge of these instruments. Our research desk focuses not only on equity assets but also on debt instruments. We got the debt funds right in 2015 and 2016 and then we again got it right in 2017. Our research and advisory services for investors focuses heavily on debt-equity allocation based on valuations, thus it is very important for us to get the debt funds right. Choosing the right debt fund involves the study of many factors: interest rate movement, macro economic data, duration, sensitivity to interest rates and quality of paper.

How will Reliance Jio earn?

In continuation with our previous article on Reliance Jio and why it won’t kill other telecom operators (Read here), we talk about the new telco’s revenues in this article.

The Mukesh Ambani led group has made an astronomical investment in Reliance Jio having funded it majorly through their energy sector operations (which is a cash generating machine for them) and different sources of debt. The shareholders of RIL have been very patient throughout the last decade as they have seen no returns from the stock. All the money that belongs to them has been drained out into the new venture. So why did the shareholders let this happen? Because they expect high returns on the new investment.
In the free trial period, JIO has already crosses the 10 Crore subscriber mark and till 31st March, 2017 our estimate is that JIO’s subscriber base will swell to 12 crores on a conservative note. Post 31st March, the free trial ends and the real battle starts then. Airtel, Vodafone and Idea users won’t readily port to JIO due to a multitude of reasons. Assuming that 50% of JIO users continue using their JIO sims, around 6 crore subscribers will be paying around Rs 303 a month for the next 12 months. Why 50%, no other subscriber will give you 30 GB  a month for Rs 303 a month! And Indians are consuming astronomical amounts of data every day now.
So what does this mean in revenue terms?


Particulars FY 2018 (E) FY 2019 (E) FY 2020 (E)
Subscriber Base  6,00,00,000 9,00,00,000 13,50,00,000
ARPU 300 300 315
Monthly Revenue  18,00,00,00,000  27,00,00,00,000  42,52,50,00,000
Annual Revenue  2,16,00,00,00,000  3,24,00,00,00,000  5,10,30,00,00,000
 21, 600 Crores   32,400 Crores   51,030 Crores 
As per our projections, JIO can hit annual revenues of Rs 51,000 Crores by March 31, 2020. Profitability and breakeven are what shareholders will look forward to. They’ll desire a faster breakeven and growing profits in the coming years. But when will they breakeven and how much profits will they earn is all the management’s will. We can just be sure of an ARPU (Average Revenue per User per Month) of Rs 300 to be maintained and slowly grow over time. This is a significant jump of ARPU when compared to that of Airtel’s which is approximately Rs 180-200.

When will JIO breakeven?

Breakeven is anybody’s guess. It makes no sense is speculaitng the breakeven when you know that it is ultimately management’s call. However as per industry estimates, the breakeven will come at around Rs 30,000 Crores of revenues which translates to our calculation of approximately 90 Million active customers.

Why would Management delay profits?

Mukesh Ambani has his energy sector business which generates lot of free cash (To the tune of Rs 30,000 crores) and this gives him a huge war chest at his disposal. He can delay profits and incur more costs to prolong the pricing war to crush competition. For example, JIO has made it clear that they will keep voice calls free forever. Now, JIO has to pay the incumbent operators whenever a JIO user makes a call to the other operators user. JIO is expected to incur a cost of around Rs 5,000 Crores per year for the next 2 years as a result of free calling. And as the subscriber base rises, this cost will also keep rising.

How much will the Shareholders expect?

Shareholders have an expectation about the return on their investment. JIO has already invested close to Rs 1,50,000 Crores and is expected to further invest Rs 50,000 Crores in the coming 2 years. With a capital of Rs 2 Lakh Crores being employed in the telecom business, the investors will expect a return on equity of at least 10% (Equity is around Rs 1.5 Lakh Crores) which translates to profits of Rs 18,000 Crores. But telecom sector is a low ROE industry. Bharti Airtel’s ROE hovers around 6% to 7%. So RIL investors can expect profits of Rs 9,000 Crores.

How can Reliance earn Rs 9,000 Crores of profits?

The telecom business is known for very high OPM (Operating profit margin) as the variable costs are low. The NPM (Net profit margin) is low because of high Depreciation & Amortisation costs of the spectrum. Take an example of Bharti Airtel which has OPM of close to 40% and NPM of just 4.5%. Assuming Reliance has a higher NPM of 8%, to earn Rs 9,000 Crores they will have to earn revenues of Rs 1.12 Lakh crores! This is more than what Bharti Airtel earns through it’s Indian and African operations combined. On the profits front, Bharti Airtel earns around Rs 7,500 Crores of PAT from it’s Indian operations (Standalone basis).

How low should their expectations dip?

Breakeven is what they should be happy with. At breakeven, RIL investors know that no more cash from the energy sector is pouring into JIO and that JIO is surviving on its own. But overtime, they will want the Rs 1.5 Lakh Crore recovered.

When will the Rs 1.5 Lakh Crore be recovered?

Bharti Airtel earns around Rs 7,500 Crores PAT from its Indian operations. Assuming Reliance earns the same PAT, for simplicity, we assume that the increase in earnings is offset by inflation and thus it will take them 20 years to recover their investments.

So what are the realistic predictions for Reliance Jio?

Shareholders have to be satisfied with attaining breakeven early into its commercial operations and have very low ROE expectations. Telecom is a capital intensive business and offers meagre returns to investors.

In the above article we have used round figures and rough estimates to arrive at a bird-eye view of the sales and profit figures. The article is intended to just show the industry model of earnings and do a similar comparison for Reliance Jio and should not be used as a BUY/SELL recommendation. Please do your own research before investing. No responsibility is taken for any losses/liability arising out of decision taken based on this article. There is no guarantee of accuracy of the figures used in this article.