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Commentary, Stocks

India Inc. Slows Down, and Nifty is Not Yet Attractive

So it seems like the view on the street is that the Nifty and Sensex have been pounded down and are now at very attractive levels to buy, and perhaps some of us retail investors should jump in now. And if you have lost your 20% in this fall, don’t worry because sometime the market will recover from here. The India story in intact, we have great growth, this is a short term blip, the overall case is fantastic for India and so on and so forth.

The truth is that we are slowing down. We need to slow down, as I’ve said before, so we can take the time, consolidate and then grow. I’m not saying one or two months, I mean two-three years. Still, the first signs of slowing down are in, in a way that people haven’t quite looked at.

On a pure Earnings-Per-Share level, growth is down to 13% year-on-year. Whoa, you say, what are you talking about? Here’s the data.

One year ago, on 7 Feb 2007 the Nifty P/E was 20.32, and Nifty was at 4224 – gives us an EPS of Rs. 207. On 7 Feb 2008, the P/E was 21.9, and Nifty was at 5133, so EPS is Rs. 234.

EPS growth, the indicator we need to see how our top stocks are growing, is Rs. 27, or 13% growth in the last one year.

Note that carefully – we are paying nearly 22 P/E for what is 13% growth in the last one year. And we considered that really fast growth, so what will happen next year as global economies slow down? Will we continue to pay such high P/E for leaders that are collectively growing at less than 15%?

P/E is affected by number of shares – and there have been some huge share offerings by ICICI Bank and Tata Steel. SBI rights is coming up too. Now you can argue that on absolute earnings we have grown around 19-20%, but that doesn’t matter as much as EPS growth – if growth on earnings can only be obtained by issuing new shares, we are going to be in for some serious surprises. Also four companies are yet to announce earnings (Cairn, ABB, HLL and VSNL) but I doubt that will impact index EPS that much.

Let’s do a scenario. Let’s say in the next one year we grow another 13% on EPS, and our P/E comes down to a level of say 15. The projected Nifty value? 4000. This translates to a Sensex value of around 14000.

A tough scenario: EPS growth at 10%, and P/E moves to 12. Nifty will then be at 3088.

Note that this is not now, this is one year from now! We have a long way to go from here if we are looking for true “value”, and even the above scenarios aren’t the worst cases. Both are extremely likely and the point of “buy” should be for a Nifty value of around 3500. (Sensex should be around 12500 then) A further drop of 30-40% from current levels. Value is still a while away, and while I shy away from predictions, this is a likely enough scenario to keep as a sanity check when someone says “there are bargains in the market”.

  • BRS says:

    >Your posts are always very rational and extremely informative. Sometime back, you had analyzed that true value of Infosys is around Rs.1600 and it is the value these days. Also, you were bang on target for BHEL as well.

    I guess in addition to the Nifty value, the EPS of some specific shares will determine if it is a good buy or not. I mean, the Nifty may be still high, but EPS of some specific shares may be low enough to be considered. Please correct me if i am wrong.

    Please continue the good work.

  • Anonymous says:

    >With US recession now a near certainity, with liquidity drying up from developed economies, highly leveraged hedge funds operating in Asia will wind down. You can see the pattern (India falls with Asia and India is also recoupling with the World).
    In such a scenario it is better to hope for the best but to prepare for the worst.
    So what is worst: History shows NIFTY trailing P/E of around 10 to 12. I am very optimistic that this will be reached sooner than later.

    Because I believe that this credit crunch and US housing woes are not to be taken lightly. It will affect everyone in this world.

  • VKM says:

    >I have been following your blog for quite some time and think you are doing a terrific job.
    However the logic which you presented here of calculating the EPS from the Nifty value and P/E ratio for 2007 and 2008 and then calculating the EPS growth looks to be flawed to me.
    EPS value is the source of the calculation, a weighted average of the components. Then the market forces drives the valuation and hence the P/E ration to give the nifty value. To find the growth in the EPS annualised, we have to calculate the weighted average growth in EPS for the nifty companies. Backtracking from the P/E and nifty levels will not be an accurate way of doing it because P/E Rations can be a factor of what the mood of the market is, global concenrs etc whereas earnings growth for a company is a given.
    IMHO.

  • Deepak Shenoy says:

    >brs: absolutely. Even in a bear market some stocks shine and one needs to find those.

    vkm: The P/E is a function weighted market cap divided by weighted earnings. THe EPS gleaned from that and the subsequent growth of that figure is the real growth of the Nifty EPS – and regardless of how you arrive at it, the EPS growth will come to the same – around 13%. REmember that ICICI bank saw an EPS growth of 2%!

    Having said that, I would love to see any weighted growth calculations that reflect a different EPS growth figure. There is always more to learn.