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Charts & Analysis

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.

  • Anonymous says:

    >You are making an underlying assumption that TTM P/E is a reliable predictor of future returns? That has been shown to not be the case in various markets over various periods of time.

    As a valuation metric TTM P/E is flawed. Schiller uses a normalized P/E for example and uses it to map trends over longer periods of time.

  • arunsg says:

    >I like your disdain for folks that make the Sensex/Nifty EPS prediction. Ironically, just below this post is the ad for the famous "sensex 21K by 2010" by the person you referred. Its also encourages one to get the "free and exclusive" presentation of why sensex will be at 21K. "Free and exclusive"? Duh?!

    We need a healthy dose of cynicism about all the so-called experts and I'm glad you're providing it.


  • Deepak Shenoy says:

    >Anon: Actually I'm not saying that – I'm saying that TTM P/E and TTM EPS Growth should be fairly similar levels (or at least, TTM EPS growth should come close!)

    I'm also saying NOTHING is a predictor of future returns, otherwise analysts would be getting it right.

    Interesting point about Normalized P/E – I find we are WAY off on normalized p/E too (using p/e of one year back and actual EPS growth today) . Will make another post about it, thanks.

  • Amit Singh says:

    >Interesting read Deepak. Well, let's see if future eps is dramattically higher than past 12 months.

    Where did you get p/e data from?

    Is it?

  • Anonymous says:


    "you want your Earnings Per Share (EPS) growth to, somehow, match the Price-to-Earnings ratio you're paying for the stock" — I am bit of novice, so could not understand this sentence. Is it not the price is always multiple of EPS and this ration will will be typically >10. How will they match ever? Sorry if this is a very stupid question.

  • Deepak Shenoy says:

    >Amit: yes, that's where.

    Anon: Read more about EPS adn P/E here:

    We're comparing EPS Growth, not EPS (i.e. the rate of change of EPS, not the EPS itself) with the p/e.

    They may not match, but if you'er paying 25 times earnings, you want to see earnings grow 25% every year at least. That's a rough estimate – some sectors will have cyclical growth so you give them lower p/e and yet others have fantastic potential. Still, on an index level you want to see valuations and earnings scale together

  • Anonymous says:

    >Just looking at P/E or EPS growth in a specific market will not make sense. Globally Indian Markets may still appear attractive despite these shortcomings. Japan had P/E of around 27 for a very long time, may be Chinese 45 may be the norm. So why not atleast 30 for India especially for hot money. But you may have to wait for few more years to get P/E of 11. Till then dance till the music stops.

  • Anonymous says:

    >Respectfully would disagree with you. Your views are more like main street view. Wall street views India in different light. Weather you like it on not Goldman rules the world. Better follow the money than emotions.


  • Anonymous says:

    >P/E is just one of the ratio's to look at. Assume a company with a asset base of 100 crores which in a cyclical downturn generates just 1 crore of profit. So 20 PE might look expensive if it is selling at a market cap of Rs 20 crores.But 80% discount to book value will not look expensive. This is just a hypothetical example.

    You need to look at P/E , Price to book and ROCE. Are our companies generating high ROCE for every incremental rupee invested in capital formation.

    having said all this I think we are a expensive market but it is not to do with just P/E ratio.

  • Abeer Bagul says:

    >Hi Deepak,

    I have been following your blog for the past 2 years and enjoy the articles. Me and my friend are thinking of doing a startup in the real estate space.

    Since you had blogged about starting something new, we would like to pitch our idea to you.

    Please let me know on abeerbagul at gmail dot com


  • The Green Man says:

    >Good comparison with the car gas. Like someone pointed out, the hot money is in India for quite some time now, no one can predict till when it will be in India. But looking at the flawed western economies and those relatively high stock prices in those markets, one might feel that indian markets are a really good place

  • Anonymous says:

    >Last I checked P/E ratio of S&P 500 was 145 that is 10 times historical average. So why not 26 for India.


  • bobby says:

    >lots of foreign funds investing here – weak $ means people want to put $ in emerging market funds – that is all that drives the sensex on the margin. p/e and other analysis is pretty much meaningless in this market in my view because it all trades on insider info.

  • px says:

    >Great read !
    Though i agree with u, the fact still remains that fixed income is giving u negative returns post inflation and taxes,plus there is the dollar carry trade. No wonder the overvaluation will remain in the foreseeable future.

  • Anonymous says:

    >Just reading the interview of FM in Eco Times leads me to believe that India will fall in line with Global Agenda of keeping interest rates low and so called stimulus on. RBI will also fall in line. Inflation damn. Senior Citizens and Debt lovers damn.


  • Mayank says:

    >very interesting read.. could you pls share the source of the nifty EPS over the past two year period.. am wondering that since the GDP has been growing at more than 6-7% annually how come the Nifty EPS has not moved much. Is it that instead of the comman understanding that nifty constituets lead the rally, it actually the other way round..