Looking at Q3 figures (now that all data is in) we have a pretty interesting result on the Nifty P/E. If I use the exchange methodology, then the way to get the Index P/E is to simply add up all the profits and use the formula:
Index P/E = (Sum of Market cap of all stocks) / (Sum of profits)
I’ve mentioned earlier that the index creators have said they only consider “standalone” profits, which according to me makes little sense now that many companies report consolidated profits on a regular basis. For instance, CAIRN has a standalone profit, in the last four quarters, of just Rs. 20.56 cr. while it has a consolidated profit of 8209 cr. Similar number differences are seen with Tata Steel, Tata Motors and the like.
(Standalone is just the entity, consolidated includes all subsidiaries as well)
So what is the index P/E if we consider consolidated profits where available and standalone where not? (You have to consider free-float shares – non promoter stake – to arrive at both market capitalization and earnings)
Consolidated P/E: 16.16
(Standalone P/E using the same calculation, comes to 18.95 and the index released figure is 18.99, for March 2, 2012.)
Consolidated Earnings (adjusted for free float) are about 17% higher than standalone.
Using the free float factor changes things around but if we were to look at raw earnings,that is – net profit with no weights or free float adjustments, here’s what we have.
Nifty Standalone Earnings (Trailing 4 quarters): 192,746 cr.
Nifty Consolidated Earnings: 232, 275 cr. (21% higher!)
The point is that while we might look at P/E from the perspective of the exchange, which provides data only from standalone numbers, the real deal is only found by using consolidated figures. At a P/E of 16, India sounds less expensive than the 19 it officially quotes.
More interesting will be to see how the Nifty earnings have grown, when looked on a consolidated basis. That will unfortunately take a lot more work from my side, in terms of programming. We have to take the Nifty constituent stock changes in the past (for instance Coal India was added recently), and the number of outstanding shares for each stock would have changed etc. An exercise for another day!
Note: The full spreadsheet is here: