The Nifty P/E (Price to Earnings) ratio seems to have gone a little astray towards the end of September, as another quarter ends. At 17.32, the Nifty is not cheap (this is standalone, not consolidated) but what’s interesting is that recently, the P/E was less than the actual one year Earnings Per Share (EPS) growth in percentage, a phenomenon that hasn’t happened since 2008.
Of course we’ve gone off now, down to 14.6% YoY growth on the Nifty Earnings per Share.
Note: Nifty P/E is released by the stock exchanges every day, and updated when earnings are updated. Nifty EPS is simply the Nifty value divided by it’s P/E.
Consolidated earnings should actually show a lower P/E (since earnings will be higher). I think I’ll have to create that P/E calculation myself!
People pay a multiple of earnings for future growth. So the P/E today is the expectation for tomorrow. That means one year later, the Nifty earnings should have grown by what the expectation is today. Taking a simplistic guess that the Price to Earnings ratio is the market’s estimate of one-year forward earnings growth, how good has that estimate been?
As you can see, last year around the same time, we paid a P/E of 19.45, while earnings growth today is just 14%.
In effect, that market estimate of one year forward growth estimates has largely been wrong (other than three points in the last five years).