Mar 24, 2020

Is It The Right Time To Buy Stocks After Coronavirus Stock Market Crash Or Not? Looking From PE Ratio Angle

Stock markets have declined in excess of 30% due to Coronavirus stock market crash in India and world over. Bluechip stocks like HDFCBANK have also fell more than 30% that is an expectancy of EPS coming down by same percentage points. Everyone must be wondering regarding what to do after crash in stock market due to COVID-19. This piece would also look into what’s in store for stock market investors in near future and if and how to take benefit of Coronavirus stock market crash. In our new articles we will also discuss about what stocks to buy post Coronavirus market crash and when to buy.

Let’s analyse this purely on maths. Suppose, the companies‘ have to shut operations due to Coronavirus effects for one quarter i.e. 3 months; in that case the sales and profits will decline by a quarter of what they are on annual basis. Take example of HDFC BANK; say it is clocking growth of 40% annually then this number will decline by 10% and the new annual growth rate will be 30%, so according to this calculation the PE should decline by 10% and not 30-50% which has been happening with most shares.
Also, unlike recessionary situation, the companies will save on many variable costs like electricity, transports etc. depending upon the nature of the business of the firm. These will cut down on operating expenses side offsetting some of the erosion on the profitability side.
The government will also provide tax benefit and other soaps for most sectors of the economy that are likely to be affected due to novel COVID-19 virus crisis and lockdown post its spread.

Some assumptions:
This analysis assumes the nationwide lockdown to be of 3 months or less.
I also assumed that the growth of companies is evenly distributed over 4 quarters.
EPS/PAT does not have direct perfect correlation with Sales as many operating factors could influence it y-o-y in different magnitude.
Investors use PE, EPS and market price of the stock as prime factors of importance while considering investment.


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