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GDP up 6.7% but Nifty EPS down 9%


According to Bloomberg, India’s economy grew “more than estimated” at 5.8 percent last quarter, to take the annual growth in the last four quarters to 6.7 percent. (Let me point out that I find this “estimate” business egregious. To tell us something is good news because a fall was less than expected, or a rise was better than expected is saying, our expecters are consistently wrong, and we think you are stupid enough to believe them. Note that no one that estimated ever comes out and says, “Shoot me, I was drunk when I said that!”. But I digress) This might sound refreshing, and indeed, the markets reacted by going up as much as 4% at some point, reflecting a sense of euphoria paralled only by inhaling, er, green shoots. So are we out of the woods? Or are we just smoking weed?

Let’s take a look at the P/E of the Nifty and the EPS growth again, just over the last five years.

For the last two years, EPS growth has been slowing down from a dizzy 30%, and is negative since Jan 09. It’s at -9% today, and the P/E currently is 20.82. The EPS at the same time last year was 235, and today, it’s 213. Why does that happen when the overall GDP grows 6.7%?

One factor is that companies issued fresh shares. Any fresh shares issued, though, must necessarily add to EPS growth – after all, if I sell shares, I get money, and that money yields me returns? And for the likes of Tata Steel, which has received money years ago for dilution today, it makes more sense to have grown EPS because they’ve had time for the money to have grown itself. But no, we have still contracted on EPS.

I need to take a harder look at what contributed to the EPS fall – was it net profits, or increased share capital? Did margins fall dramatically? Did sales increase at all? How much of EPS was “other income” then and now? Collecting this data is hard work, and I’ll do it sometime this decade, unless someone already has (please point me!).

Still, the facts stare us in the face. GDP grows 6.7%, and our top 50 companies “grow” EPS by (-9%). And our markets are still valued at a 20 P/E.

The recession hasn’t quite taken its toll here. Not a single real estate player goes bust? And they’re quite heavily levered. Not a bank, a big broker, a financial institution of repute – no, I think this is too early to be the end. It may just be the end of the beginning.

What will be interesting is where we can go from here – any further rise in the Nifty will only increase the P/E, and it’s unlikely our EPS will reverse course (in fact, there are likely to be a lot of financial, manufacturing and export contractions visible over the next two quarters). The forward EPS can only be somewhere around 200. And bear market P/Es are known to go to 10. A “buy” signal then should be around 2000? Or around the 10 P/E mark, I imagine. At this P/E I can only say “sell” to fundamental investors.

Technicals based traders would have exited this passage with a stop loss after my first sentence. But if, by a quirk of fate, you’re here, note that funny-mentals can adversely impact trading.

What I can’t disagree with is that markets just got a helluva lot more interesting. Work is more fun than I can imagine!


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