On popular request, here’s the Nifty Price to Earnings (P/E) ratio chart. Alongside we plot the Earnings growth on a per share basis:
A few things stand out:
We even calculated the five year annualized EPS growth and that comes to only 12.8%. In effect, the top companies in India have grown their profits at less than 13% a year. Of that, one assumes at least 8-9% was provided by inflation alone (since both input and output would have gone up by that much). The excess return isn’t significant, and it’s not like earlier times when EPS growth was 25% (2007).
We’ll have more data on this front, but our feeling for the past few years has been that the Nifty needs to see improvements on the EPS growth front; otherwise the “premium” P/E we are getting will no longer be justifiable. (However, markets can remain irrational longer than you can remain solvent, so please don’t go short because of this!)
Disclosure: Mostly long, but have a few short positions on the Nifty and/or constituents.