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Charts & Analysis

Senseless Sensex EPS Projections, and a Dividend Yield Problem

I wonder why I get all worked up when I see utterly bizarre Sensex EPS estimates. Basically, the modus operandi seems to be:

  1. Pick a number out of your a** thin-air.
  2. Blurt it out on TV or other media with a tie on, and carry the name of big-name finance company.

In the Sensational Sensex EPS Story, in July 2008, I noted that projections of the Sensex EPS between Feb and March 2008, for the EPS ending March 2009 (note: nearly two years ago) was 1000. Four big name fellows said so. Where were we at the end of March 2009?

750. The Sensex EPS was Seven hundred and fifty. A full 25% below what they thought just one year earlier.

The Senseless Sensex EPS Prediction story continues.

Folks, help me get this right. This is the Sensex EPS chart. Obtained by traipsing into the BSE web site and plotting data on excel.

Sensex EPS

Okay, looks like it’s going up, but at the current rate it won’t hit 1,000 till – hold your breath – the September 2011 quarter (which will be visible by Dec 2011) . And currently we have only earnings till September 2010 (two quarters of this fiscal remain to be announced).

The current Sensex EPS is around 871.

To get to 1,300, we have to increase earnings by nearly 50%, in six quarters. That is faster than any other six quarter gain in the last 10 years of the sensex, and comes in the face of very high inflation (profits are bound to drop on soaring input costs), and high interest rates. HOW? I mean are we going to be that rocking? Heck, buy everything in sight dammit!

Everyone talks as if it’s all right – oh, we’ll so about 20% in the next two quarters, then about 25% in the year after that, so we will be fine. WTF, I think – 20% in two quarters is 40% a year annualized, which is fairly out of the range of the very same people’s wildest estimates.

In any case, we’ll have to wait and see who’s right. I’m all nice with hunky-dory estimates, but currently the wet-finger-in-air approach seems to be taking center stage. What this does is that it creates an element of complacency, that’s all.

Anyway. The bigger problem – and one I noticed on a whim when I plotted it, was the dividend yield:

Sensex and Dividend Yield

The div. yield has dropped to nearly 1. The last two times it reached this low – 2000 and 2008 – the markets tanked over 40% subsequently. (In both cases, though, the ratio went further down, to 0.8 or more, before the crash) The median and mean values for Div. Yield are 1.43 and 1.55 respectively.

The current deviation is large, and we can do one of two things – dramatically improve profits and dividends, or have a dramatically drop in the Sensex to push the ratio back towards the mean. Take your pick, or tell me your alternative theory. I won’t hold you to your predictions, as long as you don’t hold me to mine.

  • Phani says:

    >Brilliant Analysis.

    I am keeping my fingers crossed for the Sensex to dip back to 18k levels. Right now I am holding 2 PSU stocks with nearly 4% dividend yield. As I believe both of these stocks will have minimum fall.

  • excel_monkey says:

    >looks like a correction is warranted

    on a different note:
    When the economy is booming and companies are trying to expand, the dividend payout ratio should fall
    therefore it might so happen that the earnings might expand but the dividend yield might come down further


  • Ganesh Shetty says:

    >A lot of people waited for the market to stabilise in 2010. It just went up. Lot of cash is outside the market. Huge FII money has flown in.

    So what should happen now is for the money that is out to move in and the money that is in to move out.

    Your chart is near perfect. Sensex yield moving down with retail money coming in.

    And FII money flowing out for a correction.


    BUT WHEN!!!! BUT WHEN!!!!! BUT WHEN!!!!! BUT WHEN!!!! BUT WHEN!!!!

  • 'Bade mian' says:

    >And this EPS is based on the P&L and the BS published. But then, after Satyam, we all know how true THOSE numbers are. To me, there needs to be a discount applied to the current 871 EPS as well (for just a patina of value investing). Good luck getting to even 900 after that for 2011 ! P/E of 25 is probably amongst the highest on earth.

  • Anonymous says:

    >Finally some sensible analysis and not some "Achieve your dreams" story

  • Abhijit says:

    >Looks like there are two camps – one is that of euphoria and another is of a massive sell-off (and both equal in numbers) – I don't think either is going to happen we'd just grind for another couple of years within plus minus ten percent of where we are – that'd set your charts also alright … 🙂 Broadly speaking, market is not insanely expensive – but it's not cheap either.. so over next few years (4-5) we'd see below average returns.. (except if India is going to become a japan story, then we'd see a mania and eventual pain)

  • Ravinder Makhaik says:

    >Surely the results visible by superimposing the sensex and dividend yield graphs are not co-incidental.

    The question that will haunt us is when will the trends break in order to get to the mean and median values

  • Anonymous says:


  • Anonymous says:

    >My dear freind
    One more point i would like to add here that you are ignoring the bookvalue of sensex.
    The bookvalue of bse-30 in nov-10 is RS.5425/-.
    If u see the past price to book ratios, u will find that major corrction have occured only when price2 book ratio is more than 6.
    Right now the price2book is near 3.7 which suggests that yet we r not in a bubble teritory.

  • Deepak Shenoy says:

    >Anon: P/B isn't very valid when you have companies like IT cos taking a big chunk of hte index. In fact, book isn't even valid when you look at many of the index constituents, and it has increasingly lost relevance. I don't particularly fancy that statistic for an index (though it makes sense for certain companies).

  • nse2rich says:

    Dear Deepak Shenoy
    Your analysis was excellent
    Now what you think?
    Dividend yield is slowly inching up
    It has crawled upto 1.3
    Market has corrected since the writing of your article and dividend yield is increasing
    What next ?