"Returns from equities will be lower than witnessed in the previous decade"
-                                                                                  Warren Buffett

CNBC-TV18's research analyst, Haresh Soneji - When The Sage of Omaha speaks, people listen. The annual pilgrimage to Omaha is said to be tough. This time round, some 30,000 weary investors braved rain which delayed and cancelled flights, traveled by road all night and queued up by 5 am to attend the six hour Q&A session Saturday. And what was the outcome of that session – returns from equities will be lower than witnessed in the previous decade. If that were not enough Warren Buffett adds that he would be happy with a 10% return, but wonders whether equities will be able to deliver even that much.

For starters, Mr Buffett is talking long term. So, perhaps a decade from now, we would see yearly returns of 10% or less. That’s for the US markets though. We would love to believe that we are decoupled from the US markets. But, the latest correction since the beginning of the year has proven that to be a distant dream. 

In India, the earnings season doesn’t throw much ray of hope. Let’s look at the benchmark index stocks to get an overall trend and valuations. Around 22 Sensex companies have declared their March quarter and full year numbers till date. These eight remaining companies usually contribute roughly 40% of the Sensex profits (PAT). So, these companies have a lot of weightage in terms of estimating Sensex valuations.

As numbers are expected till as late as June, we try to do a bit of expectations of earnings for the remaining companies. Tata Steel, Sail, Tata Motors, ONGC are the biggies that have not declared their numbers thus far. Currently Sensex EPS is around Rs 820 levels. Factoring results form these companies, Sensex EPS is expected to be in the range of Rs 838-845 levels. Earlier our analysis had estimated Sensex EPS to be Rs 852 for FY08. So, the year will end slightly lower, primarily on the back of rupee appreciation and interest costs. The other reason is that steel and auto have really not performed all that well. So, the lower end of the band suggests these sectoral numbers to under perform. The outer range implies surprises thrown by biggies, which have better pricing power and tools to cut costs which small players may not be able to enjoy.

Nonetheless, we peg our Sensex matrix on the back of the higher end of EPS. The matrix below shows Sensex levels by plotting EPS growth and PE levels for FY09.

Sensex Levels for FY09	Pessimist	Realistic	Optimistic
EPS Growth (base Rs 845)	10%	15%	20%
Fwd P/E
15x	13,943	14,576	15,210
18x	16,731	17,492	18,252
20x	18,590	19,435	20,280

Source: CNBC TV18 Analysis

As seen, the Sensex at fair valuations doesn’t seem to be running away anywhere. With signs of nervousness around and US in an election year following which a full blown recession is expected, we might not be able to pull through smoothly. Already many experts suggest earnings to grow in the 10-15% range for the coming year, as of now. And having burnt their hands on exotic derivatives, India Inc. will now like to stay away from them after squaring off their existing positions. Also, main stream capex is expected to go full throttle by FY10. So, it’s a waiting game that investors have to play. But, individual stocks keep providing value to long term buyers. Identify them and invest for the long term.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products.