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Commentary

Nifty Index EPS growth in Q2 2008-09

I want to look into the October results season and see what the results may bring to us. It’s not good and I know I sound depressing but its better to get depressed now than disappointed later.

How are we going to fare going forward, with a worldwide recession at a minimum and a severe depression at the other end? The Nifty consists of various kinds of stocks and let’s see the outlook for them all.

  • Oil (26% weight): Outlook is bleak only because oil prices are coming down, and so are refining margins. The refiners will make further lower margins as demand of products (petrol/diesel/etc) come down because of lowered demand in recessions. Some of these companies have huge FCCB loans, which will have to either dilute the stock or be paid at a much higher dollar value, hitting the bottomline. Lastly the oil finds of recent times will need money to explore and exploit – money that isn’t going to be easily available. Earnings growth should come down dramatically – from 15% average last quarter to perhaps 5 or so.
  • Power and Power Equipment (14.5%): Power is a regulated sector so the plants will have limited profitability. Till now, the equipment vendors have been able to finance and grow customers easily. But going forward, money is less likely to flow into this capital hungry sector – mostly because of lack of available money. So power plants that are “planned” stay on the drawing board, while others cut their aggressive growth plans. That, and again a high ECB/FCCB exposure with a dollar impact, hurts them in the coming quarters.

    The last quarter these guys announced a -18% EPS growth, on average. This time it is likely to be the same or worse. Note here: EPS will dip.

  • Financials (11.36%) – Last quarter they grew -1% on EPS. This quarter will see capital write-downs through sales of ABS, or derivatives, effectively booking the loss. NPAs aren’t likely to contract – chances are that they will increase. Plus, bond portfolios will see mark-to-market losses as rates have been increased. I would not be surprised to see a further 1-2% EPS contraction.
  • IT (11%): While some companies like Satyam may have some losses with deals with financials, the overall growth is likely to be decent. Rupee’s down a lot, and while they would’ve all hedged, some did take out part of their hedges. The growth was 26% average last quarter (not considering HCL Tech) which I think may pare down to 20%.

    But the problem is the outlook. These guys provide a lot of services to bank and financial service companies abroad. Some of which may not survive the year. And the rest will cut spending like crazy.

  • Telecom (10.3%): Should have done well. But there’s this whole external borrowing thing that’s very weird, and if accounted properly, might cut dramatically into profits. Either ways I expect about 15% EPS growth on average.
  • Realty, Cement (totally 6%) – Ok this bit is hosed, and I don’t expect anything good out of this. Last quarter cement was down 18% on EPS, and Realty up 13% – this time I expect both down about 20% each. Realty has a weirdo accounting logic so what it really is may not be what is shown to us.
  • Auto, FMCG (6%) – Probably will keep EPS stable. Means 0% EPS growth, according to me.
  • The rest: There’s Pharma, which will get hosed with FCCB but should be defensive otherwise. There’s Zee, the only media company, which I have zero opinion about. There’s L&T which has a reasonable order book but gets tied down with its dollar exposure (though it’s the only company I have a positive outlook on).

Overall I think we’ll grow Nifty EPS by even lesser than the 10% we did last quarter. And the Nifty P/E is still 17+. That means the EPS is about 235. A 10 P/E then should mean…well, let’s not even go there.

Remember that this is all “funny-mentals”. There is very little “value” to this information – that is, very little tradeable value, because you never know what will happen, and my assessment is just my opinion. In fact it may be so that I end up being long on the market – because in such markets you change your opinion every day, if not every hour.

While you can’t use this info to dictate price, it’s interesting that the fundamentals back up the fall in the indices. It’s not just an arbitrary fall, like in 2006. It’s not an event driven fall like in 2004. This is a huge, massive, bear market. The end is not near, and it’s not even the beginning of the end for us in India.

Our news flow, when it comes, will be very bad for the markets. Some of you are thinking: what can be worse than this? One or two days of big deep falls are actually a good time – because you can act. What is worse is 6 months when the index moves, literally, 10 points a day, and mostly down. People lose interest. Nobody “books” their losses – they simply forget they had ever invested. There are no buyers for even the midcaps, and no sellers either, so the market is in some drug-induced stupor.

That’s much much worse than this. Imagine two years of say a -10% growth. Nothing scary, nothing to cheer about either. I’m hoping an automated system will do well – we’ll see.

  • RD says:

    >Hi is Nifty eps 235? I thought sensex eps was close to 1000 tht means sensex is at a PE at 12. Now there cant be so much of a difference between sensex & nifty?

  • Deepak Shenoy says:

    >RD: I’m not sure where the Sensex EPS was 1000, because current figure is Rs. 795 (as per BSE India, P/E is 15.75 on a value of 12,526)

    Nifty P/E is marginally higher at 16.41 – not too much of a diff.