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Nifty P/E and EPS Growth: Still Insane

I talk about this often – typically, you want your Earnings Per Share (EPS) growth to, somehow, match the Price-to-Earnings ratio you’re paying for the stock. This, at an index level, makes even more sense – a single company may be irrationally high priced or have very high P/E, but the index as a whole should demonstrate EPS Growth levels close to the P/E you pay.

Here’s where it’s continuing to not make sense. Following my April and August posts, the Nifty P/E continues to scale new levels, while EPS stagnates.

Nifty P/E and EPS Growth: Still Insane

(Click for a larger image)

Values as of 18 Dec 2009:
Nifty EPS: 224.57
Nifty EPS one year back: 228.07
EPS Growth: -1.54%
Nifty EPS TWO years ago: 222.48

Remember, the Nifty’s gone through a number of changes – stocks like Satyam have been taken out; RPL and RIL have merged; low growth companies that lost market capitalization were replaced by faster growing, more exciting stories. Yet, the index EPS has barely budged in two years!

The P/E is back to very high levels of 22. From here, you can’t expect more P/E expansion (ok, we can follow Chinese routes and expect a P/E of 45, in which case you are already a trader and should not read beyond this point). What needs to happen is for EPS to grow. And fast.

People have been talking about the Sensex EPS hitting 1000 for around two years now. (Read: The Sensational Sensex EPS Story, July 2008) Predictions for the Sensex EPS were 1000+ for all this time and what’s the Sensex EPS today?

Answer: 780.

Now everyone’s got a short memory. Ajit Dayal decides the 2010 EPS – two quarters away – is going to be 960. Kotak Securities, the lowest of the Sensational Sensex Estimates in July 2008, says 2010 EPS will be 913. The 2011 estimates are all above 1000 and there are ridiculously huge figures like 1,400 being bandied about.

I have realized that if you predict sufficiently far away and don’t refer to your past failures, people are likely to believe you. So I say that in 2100, the Sensex EPS will be 43,846 (*).

(*) Unless there is a tropical cyclone around Andhra Pradesh, which impacts my 2040 growth story estimates.

The Nifty or Sensex EPS is hardly predictable, but since people’s salaries depend on it we are going to see more such predictions. I’d like to see who ends up being right. I am not going to attempt to predict it, because I can’t, and am currently incapable of lying with a straight face. That is a fault I must rectify.

But if we don’t see some of that 7% GDP growth in the Nifty EPS, things aren’t as good as they’re made out to be. When I drive my car and it’s low on gas, it drives beautifully; this seems like that kind of ride right now, and just like in my car, I don’t know when it’ll stop. I hope we fill some gas.

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