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Charts & Analysis

Nifty EPS Growth Charts, Sep 2011

Following up after @kirandhanwada tweeted asking for the latest in EPS and EPS Growth figures, after my post around the same time last year:

As data points go this is disappointing. The Nifty Price to Earnings ratio (P/E) is at 23, the Nifty Earnings Per Share is 237 which is a 6.76% growth from last year.

  • On Sep 3, 2009 the Nifty EPS was 222, the Nifty was at 4,600.
  • On Sep 4, 2008, it was 236. In two years, we have gone NOWHERE on earnings. The Nifty, on the same day was at 4,447 – we are about 25% higher today on Nifty value at 5500 but the EPS remains the same.
  • On Sep 3, 2007 the Nifty EPS was at 220, and the Nifty at 4400.

On Sep 2, 2011, the Nifty P/E is 18.19 which corresponds to a Nifty EPS of 277. This translates to a remarkable 16.56% growth in the year, which means we have finally seen some recovery in the Nifty EPS.

Nifty P/E vs. EPS growth

(Note however that these are figures that are standalone EPS – the exchange doesn’t release the consolidated aggregate P/E for the Nifty, which makes comparison a difficult thing)

While this is good note that the EPS growth over the last four years is:

  • From 2007 (Four years): 5.9% annualized
  • From 2008 (Three years): 5.5% annualized
  • From 2009 (Two years): 11.7% annualized

The problem really is this: The Indian GDP has gone up a nominal 81% in that time, from 43 lakh cr. to 78 lakh cr. which is about 16% per year. Per capita income has gone up from 35K to 55K, an annualized growth of 12%.  EPS at the Nifty level has gone up just half that.

Normalized P/E

People say P/E discounts the future, not the past. So if we are at 18 today, we are likely to grow 18% of more in the next year or so. That means that in the past our P/E should have reflected our current growth? Why not plot Nifty P/E one year ago, to the EPS growth today?


Answer: the Nifty P/E doesn’t have a frikking clue.

We might grow 25% next year, and we could still have a very low P/E. Or, we could grow at 5% next year, and then the current 18 will sound high.

My view: increasing interest costs will hurt corporates and we will see a slowdown in their earnings. around 20 of the 50 Nifty companies showed an EPS contraction in the Apr-Jun quarter compared to a year ago. Subsequently interest rates have been raised even higher. This is not going to be a smooth year ahead.

Also see: My video on Nifty P/E and EPS growth

  • piyush modi says:

    I am not sure who told you this, but a PE of 18 on Nifty does not mean that the market is expecting an EPS growth of 18% over the next year. This relationship is not linear, nor is it true.
    This notion might derive from the fact that there is a ratio called PEG ratio, PE to Growth ratio, and which is ratio used to give a relative measure for an absolute number such as PE. So while people do say that a PEG ratio of less than 1 means that the market is cheap and vice versa, but that does not imply that a PE ratio of 18 means market is expecting 18% Y-o-Y growth in earnings.
    Anyways, when i first started out investing some 6-7 years back, I would look at all these things only, PE ratios, PEG, P/B etc etc. Over time, I’ve come to realize the limits of these ratios and using them solely to guide investments. Good companies trade at high PEs and continue to trade so for years till they don’t. Where as there are literally hundreds of firms trading at PEs of less than 3-4, and again they will continue to trade there till big institutional investors decide these deserve to trade at better valuations and then they become multibaggers. That’s what happened with Unitech in 06-08. But knowing which ones will be the multibaggers, well I cant claim to know how I would identify them.
    A method which works better is to just look at sentiment around you and on television. Last week sentiment was pretty bad on TV and indifferent all around you. I would say this would be a very good time to buy. If you don’t know what to buy or want to play it safe, just go and buy large caps. There will come a time sometime over the next 1, 2 or max 3 yrs when the opposite is true. Sentiment all around you is bullish, and commentators on TV are happy and bullish, the technical analysts will be bullish, or will strongly advise you not to short. Then slowly over 2-3 months unload your stocks.
    You will mostly make decent money, and if you are lucky, a tonne of money, just by doing this. No need to bother looking at PE, earnings growth, inflation, gdp growth, interest rates etc etc etc…. Just have the guts to ride the growth in your stocks during this period and don’t look to book profits at every 10% move.
    Lastly, leaving aside valuations for a moment, lets just look at big macro trends which will shape the future, and it will undoubtedly tell one that increasingly events of past 2-3 months are going to make our future look much rosier. If world growth is going to come off, not only should we see lower commodity prices, emerging countries with lower inflation and higher growth will look way better than developed markets with anemic growth. While one can make an argument that a similar argument of de-coupling was given in 08 and it turned out wrong, it will not be the case this time round simply because institutional investors will not make the same mistake twice, plus, DM growth slowdown should not hurt EM growth as credit probably wouldn’t freeze up this time round as it did last time. India lowest growth at the depth of US panic was 6.5%. This time round we can sustain 7.5%+. Slower world growth should finally get RBI to slowdown its hike cycle or stop it. So we might be coupled on a day to day basis, but over weeks and months we will start outperforming.
    Secondly, the domestic movements and actions against corruption should pay massive dividends in years to come as hopefully it will only lead to positive outcomes. The coming internet on mobile revolution + UID + peoples changing attitude towards consumption will also be game changers.
    So while the futures looks good, the gloomy present provides one an opportunity to build a good portfolio at cheap costs. No one makes great money buying when everyone else wants to buy and selling when everyone wants to.

    • 1. the PEG = 1 is a rule of thumb – I admit a generalization but you need something close to the ballpark.
      2. High P/E companies are ok. High P/E markets, usually not.
      3. If Europe fails, credit will freeze (it’s much bigger than LEH).
      4. I don’t believe we are insulated from a global issue, but our near term problem is inflation
      Yes, I like India’s growth story too. But they all said that of Japan in 1989 and China recently. I don’t think a great economy
      is the same as a great stock market (also in this post, is why India grew 16% but Mr. Index EPS grew 5.5%)
      Also, nice points, thanks!

    • Praveen says:

      A nice comment which itself can be a blog post 🙂