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Commentary

The Sensational Sensex EPS Story

So I read through some past projections of the Sensex EPS as of March 09.

Don’t diss these people, those were very different days. Now where are we today?

As of July 4, Sensex is at 13454, and P/E as given in the BSE web site is 16.61. This translates to an EPS of Rs. 810.

To get to Rs. 1,000 we need 25% growth over the next 9 months. Annualised, that is 33% growth! [Correction: The Sensex EPS is as of March 08, so we need only 25% growth. But I stand with the rest of the figures – maybe a 10 or 20 buck higher EPS on the sensex in 09. Thanks Ninad for the feedback.] With Inflation, interest rates, global slowdown, this is going to be really tough. If we get to 900 by March 09, that would be good – and 12 P/E there is about 10,800 on the Sensex.

This is just something to have in mind when people tell you that at 12,000 Sensex P/E is 12, and darn cheap and all that.

  • Kiran says:

    >If we consider the P/E for the total of our bull run it goes from around 12 to 21 though arguably at 12 we had much better prospects for growth than we do today (not only prospects, our companies did show amazing growth).

    However, we are back at the beginning now. While the short term outlook is not rosy, the long term outlook with the rise of Indian companies and indian brands with their M&As seems to point that the India story is here to stay (if our govt. lets us that is).

    I do think that this is a fairly valued level. Do tell me if my points are not valid.

  • Deepak Shenoy says:

    >Kiran: I don’t know about that, because the numbers point otherwise – that for the past year the growth has only been 10% on the sensex EPS, and current p/e is still 16+.

    The India story may be good long term, but market expectations may be higher – so markets may need to correct more in order to provide real value.

  • Ninad Kunder says:

    >Hi Deepak

    The EPS would be as on March 31st 08 since Q1 09 has still not been declared. So we are really looking at 25 % growth and not the 33% number.

    Also just 5 stocks Bharti, Reliance, L & T, ICIC Bank & Infosys constitute about 43 % weightage on the Sensex with reliance has a 17% weightage. If the gas comes thru for reliance & the refinery starts operations in the second half, then on a consolidated basis reliance will push the EPS up.

    More importantly, I think the undervaluation is really stocks beyond the index where quality stocks are available at single digit PE. A SKF at 7 PE or a mysore cement( heidelberg) at 4 PE, or a goodyear at 6 PE.

    Cheers

    Ninad

  • Deepak Shenoy says:

    >Ninad: Good point – and true, I was looking at the march figure, thanks for the correction! Now we need 25% on the whole year.

    ICICI will probably not have much eps growth – they have way too much capital. Neither will the rest of the banks. Tough times for most of the RE and Cement pack too in this year, and same for auto. FMCG will probably top at 10%. ONGC is a loser.

    I would expect Reliance to do about 20-25% this year, and same with L&T/RCOM/Bharti. Most of the rest will likely be at or below 20% on EPS, and some will lose money. Cement, Banks, Auto and FMCG will probably add up to 10%.

    Even if you take a 15% EPS increase overall , that’s an EPS of 930. And a 12 P/E on that is 11,100.

    Now we’ve done about 16.7% on the Sensex EPS last year (july 4 07 to jul 04 08), and that was a good year. I doubt we’ll even do 15% this year, and even there the 12 P/E argument isn’t valid. Still, let’s see after Q1 results.

  • Anonymous says:

    >Citi has come out with a recent note on this http://deadpresident.blogspot.com/2008/07/india-strategy-july-4-2008.html

    Two things-
    Seems to talk of FY08Sensex PE of 15.3;
    Reconfirms a 20% growth from these levels after all earnings downgardes..

    Am sure you will find this useful
    Look forward to your view

  • Mahendra Naik says:

    >Hi Deepak,

    I think the attractiveness of the markets from these levels is a relative term depending on your time horizon as an investor and your ability to bear short term pain for longer term profits with the conviction in your picks.

    I agree with Ninad’s comment that most of the undervaluation is in individual stocks. Therefore it would make sense to look at picking stocks with sound fundamentals rather than focussing on the indices.

    Even with the much beaten down PSU banks the fear is on account of MTM losses on treasury holdings. But over the longer term these losses would even out as the bonds approach maturity or interest rates come down. Meanwhile you have good businesses available at below BV, less than 5 PE and with great dividend yields to boot. The negatives seem to be in the price and I feel that an investor can expect 25 % returns in 12 month’s time

  • PhoenixOverTheStreet says:

    >While we had a EPS of Rs 810 for the year 2007-08, I feel there is one thing that everyone misses while predicting sensex targets i.e., fall in corporate profitability.
    Assuming we have a global recession, we might see a 10% fall in earnings for the year 2008-09 and a further fall of 12-13% the year after that.
    Given that scenario we are looking at a sensex EPS of 634 for 2009-2010. A P/E of 12 at that point gives us a target of 7610.
    Any thoughts for and against this idea are welcome.

  • Makarand Kokane says:

    >(I’m Makarand, an investor like you all. Stumbled accross your blog while searching for interesting readings on google.)

    I would like to add one point about future prospects. I am of the view that the probability of a recession or even a slowdown in medium to long term, is very less.

    Current fears of recession are because of rising crude oil prices, commodity prices and inflation. One important point to note is that rising commodity prices and inflation are indications of a hot economy and excessive growth. Institutions consider these as scarce assets and buy them because they expect demand to continue to remain more than supply in the future and this can happen only when there is growth. In a recession commodity prices go down, inflation is low, in fact there could be stagnation and deflation.

    One more reason for fears of recession is that people try to co-relate us with US too much. U.S of A is a different story with their subprime problems and rising debt and they affect us only to the extent of out exports. And there seems to be more co-relation because of hedge funds which move all markets in tandem.

    So I think this is a short term correction and sensex is less likely to trade below a PE of 14 or so anytime. Just a view..

  • AN says:

    >will the UPA win have any substantial effect in the long term?