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Nifty EPS Chart: Dropping Consistently

As we start a new quarter, and a new financial year, let’s go back a little bit and look at the previous two years. The Nifty EPS, calculated from data on the NSE web site, seems to have slowed down dramatically and has indeed stayed in deep negative territory in terms of year-on-year growth.

At the current value of 3211, the Nifty P/E is 15 – for what has been an astoundingly low EPS growth in the last 1.5 years. The Nifty EPS touched a high of 240 in end-July 2008, and has been going down since, to the latest figure of 211.

EPS growth – trailing twelve month EPS that is – peaked in late 2007, and since 2008 has been falling off cliffs each time results are announced. In the Jan 09 results – for Q3 that is – we saw EPS falling 10%.

People say EPS growth is what P/E is all about; in most cases P/E should be around the same as the EXPECTED EPS growth. In 2008, we had already stagnated on the EPS front, and since then have dropped – meaning, price is rarely an indicator of fundamentals or even expectations; it’s an indicator of sentiment.

Going forward, the coming year isn’t expected to be great. Meaning, EPS could drop even more. That might involve a drop in the P/E too – to as low as 10. At that rate, the Nifty could go to 2000.

On the other hand, if the market is right, EPS should go up 15% in this year, to about 240, which then would indicate a price of 3600 on the Nifty.

Which one will it be? Time will tell – but I believe markets overreach on the upside and on the downside. The downside overreaching, in this case, hasn’t yet happened – so I personally expect a move back to where “value” will seem appropriate.

But there’s a rally on, so let’s sit back and enjoy it. Fundamentals are good for blabbering. Price is good for making money. I could blabber short and trade long. Or, I could go for a Taleb approach and buy OTM puts for the next three months. And lastly, I could work with a system that follows the price and live with the whipsaws. Choices, choices.

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  • Anonymous says:

    >I am not sure how long the rally is going to sustain, but I believe the retail investors are participating heavily in the rally.

    Almost all of my colleagues have invested almost a lakh on ELSS in the belief that prices are low and they will make huge profits in the next three years (anecdotal evidence to bolster my point, can be discarded).

    I would have done the same too but I was scared. I have been working for the past 5 years. The first two years I wasted away without any savings. Then for the past three years I have been investing 1L on ELSS making a vow not to touch it till retirement. This was supposed to be my pension fund. However in three short years the current value of those funds is 1,45,000.

    Now I am left with wondering where to invest the 80c amount. Any ideas?

  • Anonymous says:

    >Good analysis by Deepak.

    The question remains which way the sentiment will swing. This rally seems to have legs (as stated by above Anon). But the sentiment will take a big hit if Third Front led unstable Government comes. Secondly 4Q results will be bad. Markets finally are slaves of earnings and I feel 2000 is a real possibility. If I were like anon above, I will wait for 2000 Nifty.

    Anon 2

  • Siddharth says:

    >Deepak,

    “The Company has always been submitting its Unaudited Financial Results to the Stock Exchanges within one month from the end of the Quarter i.e. within the stipulated date. However, for the last quarter of the financial year 2008-09, the Company intends to submit its Audited Results (instead of Unaudited Results) within three months from the end of the Quarter i.e. within the stipulated period”

    Just saw this in few of the companies corp announcement section. Hmm smells rat? Obviously not everyone doing the same way. But does this give a co some more time, by which the stock also gains in the continuing rally and by the time -ve results are published the equity goes lower, but from a little higher level?

    naive blabber. but who does it help by going this way and is this standard practice?

    cheers

  • RD says:

    >Hi DS. Markets usually factor in whats going to happen 6 months forth. . .hence if the markets are rallying now it might be a reflection that the EPS of the Nifty might go up. . .agreed the EPS is falling but thats why the markets also fell? correct? I think the worst might be behind us . . .what do u think?

  • Deepak Shenoy says:

    >Siddharth: This is done every year 🙂

    RD: I wouldn’t say that – growth had already slowed in Nov-Dec 07, and that slowdown should have been reflecting in prices EARLIER. The markets seem to have fallen after.

    EPS growth in Nifty may be possible to a small extent once we have removed RPL (non-earning) and added another component – but that won’t add up to more than 1% in weight, so the earnings bump-up won’t be much.

    I doubt we’re anywhere close to lows on earnings – I have a strong feeling EPS will continue to dip for the rest of the year. But let’s wait and see if your theory is right (i.e. market is reflecting future growth). Anyone knwo what the estimates for EPS are?

  • RD says:

    >Hi DS, I take your point on the EPS falling for a couple of Quarters. . .Why I say that markets look 6 months ahead is : The slide started in Jan 09, the worst in the industry was no where to be seen then. . .The I Banks started to fall somewhere in June. . .Indian Markets outperformed the other markets on the downside in October, yet everyone was surprised when the IIP nos came negative a couple of months after. . .But my theory why we might have seen the bottom is based on technicals rather than on fundamental analysis. . . and the basic reason for that is the higher highs and higher lows that we are making. . .last few rallies have failed to clear 3000 this time we are near 3400 . . .also the double bottom touching at 2500 around . . .hence this rally looks different. . .we are def going to go down but this time we will not go till 2500 is what I think . . .anyways on a different level, firstly congrats for your new assignment. . .I have been following your blog for quite some time and am really happy to see an entrepreneur realizing on his dreams. . .infact I also run a small blog of mine. . .maybe following in on your footsteps 🙂 gr8 going. . .